Future Generation X Family Business Owners
1. What’s stopping you from taking over the family business? What are the obstacles or barriers standing in your way?
- Parents not letting go? (Often the result of not having a planned exit strategy or unable to cope with the emotional trauma of relinquishing the business leadership role.)
- Parents being financially dependent on the successful continuation of the business for their retirement lifestyle? (Usually an issue if the family business represents 65%-85% of the owner’s net worth.)
- Parents reluctant because you don’t have the cash to buy them out at fair market value and understand that a purchase from cash flow will trigger a significant tax dilemma?
- Parents hesitant because they feel obligated to treat all family siblings equally, even those not active in the family business?
2. Are you a 2nd- or 3rd-generation family member active in the family business?
3. Do you see yourself someday running the family business?
4. What about senior management or your parents, do they see you running the business someday?
5. Are you being groomed and/or are you preparing yourself for this eventual day?
6. Is this transition scheduled to happen within the next 3-5 years or 5-10 years?
7. Are your parents financially prepared for any unforeseen contingencies that could disrupt or terminate the transition of the family business, such as a premature death, a long-term disability, a divorce or the death of a key employee?
8. Will the death of your parents trigger an Estate Tax that could force the sale or liquidation of the family business?
Your Parent’s May Not Know What They Don’t Know About Business Succession
Your parents may have the best intentions of transitioning the family business to the next generation, but they may not know how or where to turn for professional help. Case in point—in a recent survey of business owners, of which 57% were Baby Boomers (born between 1946 and 1964), 96% of the respondents agreed that having an exit strategy was important for their future as well as the continuation of the business beyond their leadership. Also noted were the three most important or essential exit planning objectives:
1. Financial independence
2. Harmony among family members
3. Minimizing taxes
Though 96% of the respondents agreed that having an exit strategy was important, less than 23% claimed to have a written Business Exit Plan.
Become Informed About Family Business Succession
In a survey of family businesses 88% of the CEO respondents believe that a family member will still maintain control of the business in five years. Approximately 40% expect a leadership change within the next five years and 56% within the next 10 years.
Succession statistics dramatically undermine these beliefs. Only about 30%, less than 1/3, of family businesses survive transition to the second generation and only 12% to the third generation.
It is obvious from this data that there is a significant disconnect between the optimistic beliefs of today’s Boomer Generation business owners and the reality of a successful transition to future generations. Most family businesses fail to survive generational changes in leadership.
The Root Cause of Succession Failure
A lack of planning is the root cause of succession failure. It is interesting to note that over 33% of next generation respondents, Generation X, have no knowledge of their parents’ business succession plans. In a 2006 Price Waterhouse Coopers survey, 53% of the chief executives of the
fastest growing U.S. private companies responded that they have never addressed the succession of the family business in their estate plans. Fewer than 25% of these respondents have had their estate plans reviewed in the past five years. This lack of planning is the root cause of succession failure.
“At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue.”
To avoid the family business from becoming another statistic, convince your parents to map out a transfer strategy several years before they want to retire by developing a written Business Exit Plan. The sooner they start, the better the chances of a successful transition to you.
What is a Business Exit Plan?
A Business Exit Plan is a road map designed to help your parents successfully transition the family business to the next generation. It addresses the important business, personal, tax and financial issues necessary to ensure that an inside transition has a high probability of succeeding. It takes into consideration contingency planning—expecting the unexpected—so that an unforeseen event, such as, a premature death, a prolonged illness or total disability, does not disrupt the timeliness of the succession process. A Business Exit Plan’s ultimate purpose is to maximize the value of the business to the parents, minimize the tax liabilities for all parties and ensure the likelihood of a successful succession.