Last updated on November 4, 2019 at 10:09 am
Family businesses currently account for about 90% of all corporate entities in the United States. They’re popular, in part, because family businesses present extraordinary opportunities for building a legacy in the community — professionally, philanthropically and socially.
It’s an awesome honor to see your name on the front door and know your reputation is on the line. But despite all the pluses, there are challenges to being a part of a family business. There’s emotional baggage that often negatively influences family interactions – potentially causing deep resentment or jealousy. If these conflicts go unaddressed, the business and the family will suffer. And, in the worst case situation, both can be destroyed.
With this in mind, family business succession planning is a critical issue for the owner of any family-run business. There are good reasons for keeping the business in the family. Your work can be more fulfilling, you have the potential for greater financial opportunities, and you’ll have pride in knowing that you’re building something for the future (and your gradual retirement).
However, there are many stumbling blocks that the business owners can face when working with their successors. It’s very important that you structure the business transfer to ensure you minimize the tax impact on your company and family.
It’s also just as important to properly prepare the next leader for their coming role and responsibility. That includes thorough training and mentoring. Both the personal and professional perspectives must be addressed.
As the business owner and decision maker, your family business succession planning will start with a few key questions.
1. Will there be multiple children or perhaps other family members involved in the transition?
2. Is everyone involved is equally interested in an active role or capable of assuming one?
Having the answer to these important questions will pave the way for implementing a deliberate, thoughtful and seamless process for selecting the best successor to ensure continuity and stability, manage conflict and transfer power.
Handling the human side of a successful succession is critical. Once a plan is in place, it’s up to the current family business owner to work with their advisors to decide how to execute the transition from the financial and legal perspectives. This means deciding whether to will the business, gift it (perhaps using a grantor retained annuity trust – GRAT), sell it to the next generation, or transfer the business to a trust. Each of these alternatives has pros and cons and there is no wrong or right answer. You should make the decision based on the goals and objectives of the current and future generation family leaders.
A heartfelt and transparent discussion with the company’s CPA and attorney can help clarify matters and enable the family to proceed while keeping the business in the family through an effective inter-generational process.
Ken Bagner is a member of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock Assurance in NJ is proud to partner with NJSCPA to bring you valuable tips about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance in New Jersey.
Click here for more information about insurance in your state.