People generally believe the most common reason for the failure of the family business to successfully pass from one generation to the other is the death tax.  Politicians certainly use this belief as the major contributor.  However, Australia has same failure rate for passing on family business as does the United States but it does not have a death tax!

Statistics have proven that the simple culprit to this problem is that no planning has been done.  It is interesting to note that family businesses make up 90% of 15 million businesses in the United States almost 70% fail to transition from the first generation to the second.  This statistic came from the Denver Post “Business News” in April of 1990.

Securing Cash Flow.  The key to start a proper business plan for the next generation is to first secure sufficient cash flow to the patriarch or matriarch of the family business.  If they are not secure regarding their personal cash flow needs and how to pay for their ongoing living expenses, planning for the next generation more than likely will not occur.

For example, if the business owner has never paid a dividend from his or her company but only a salary, how are dividends going to be distributed upon his or her death?  The new business manager will want a salary and the surviving spouse who is not an employee, dividends. How is this cash flow conflict going to be resolved between the surviving spouse and the new business manager?  There are ways to handle this matter but it begins with planning and dealing with the business’ unique set of circumstances.

Another interesting statistic is that the percentage of family business owners that are tending to pass a business to a family member that has a plan or not.  Of the 100% of family business owners only 25% have a written succession plan while 34% have an unwritten plan and 41% don’t have a plan at all. The Process.

Succession planning is a process, not an event.  It means a change in role, and perhaps identity, for many of the participants, and with any transition comes resistance and stress.

One very important thing to remember is that human capital (family members) leads to financial capital and security. In today’s global economy, businesses will change dramatically within a very short business cycle compared to the past.  The bright family member who does not work in the family business (human capital) may have a wonderful idea regarding maintaining the overall family wealth in a different form or be aware of other business opportunities.

For the business it involves three separate, but interrelated systems: (i) management, (ii) control, and (iii) ownership.  Transition for outgoing manager (usually dad) means letting go and not looking back too much.  For the incoming generation it means taking hold.

What are the Factors that Mitigate against Continuity of a Family Business

• a. Lack of clear goals or objectives;
• b. Lack of commitment to future of business;
• c. Conflict between business and family systems
• d. Financial dependence of family member(s) on business;
• e. Failure to consider importance of key employees on business; and
• f. Failure to develop a workable liquidity (financial) plan for taxes and support of survivors.

How do you plan a Succession Business Plan Process?

The cardinal rule of any successful planning is that the economics must work in order for the plan to be successful.  No one has a crystal ball but all things being equal the most important part of a successful business succession plan is the work by the family members to make certain that the economics will help achieve having the plan attainable.  With that in mind you should do the following:

1. Review of Family Circumstances:

• a. Family relationship;
• b. Retirement income needs;
• c. Needs of individual family members;
• d. Views regarding equal treatment of children;
• e. Charitable objectives, if any; and
• f. Emotional factors.

2. Review of Business Circumstances:

• a. This includes the value of business;
• b. Cash flow from business;
• c. Reinvestment requirements;
• d. Long-term prospects for products or services;
• e. Professional management requirements; and
• f. Emotional factors.

3. The Plan for Management and Ownership is comprised of:

• a. Identify management successor(s);
• b. Plans to train successor(s);
• c. The role for non-family members;

4. Identify Tax Planning Opportunities and Pitfalls:

• a. In this process not only is the estate it is minimizing both income and estate taxes upon ownership transitions; and
• b. To provide for liquidity to pay for estate taxes.

Conclusion.

By first securing the cash flow requirement for the current business owner the planning process dealing with the family wealth can begin.  Human capital (you and I) is the center of ongoing continued financial capital security.