If you own and operate a family business, more than just profits are at stake when you consider the future of your company. In fact, you likely hope to pass the business on to the next generation as part of your legacy. To do that, you need to plan early and plan carefully. To get you started, the Arkansas attorneys at Wilcox Attorneys, PA discuss the need to include business succession planning in your estate plan.
The Importance of Business Succession Planning
After declining for decades, the resurgence of small, family-owned businesses in the United States is remarkable. Today, over 80 million people, constituting more than half of the nation’s workforce, work for family-owned enterprises. Together, these family businesses contribute significantly to the nation’s economy, generating almost $6 trillion, equivalent to 64 percent of the U.S. gross domestic product (GDP).
Unfortunately, the prospects of family-owned businesses surviving for multiple generations remain low. Only about two out of five small businesses successfully transitioned to the next generation and the average lifespan of a family-owned business is just 24 years. A mere 13 percent of family-owned businesses make it to a third generation, and a dismal three percent of business owners are operating a fourth generation (or more) family-owned business.
Lack of planning is the number one reason why small family-owned businesses don’t successfully transition from one generation to the next. Without proper and comprehensive planning, a family business is vulnerable. Often, the focus remains on the present, neglecting the long-term vision and strategy necessary for continuity. The absence of a well-structured business succession plan can lead to internal conflicts, financial instability, and operational challenges that jeopardize the future of the business.
What Is Included in Business Succession Planning?
If you hope to pass down your family-owned business to the next generation, planning is crucial. Even if you already know that the business will not be passed down, you still need to plan accordingly to ensure that you and/or your family reap the benefits of the business.
If you plan to pass the business down to the next generation, one of the first things you need to do is to choose your successor and start preparing him/her to take the helm. Long before you plan to officially hand over the business, your successor should be preparing to run the business and your clients and business associates should be expecting the transition. You also need to lay the legal groundwork to legally transfer ownership of the business. A common mistake made by small businesses is leaving the legal transfer until after the death of the matriarch/patriarch. Often, that results in a significant federal gift and estate tax obligation that can completely deplete the liquid assets owned by a small business, effectively resulting in the closure of the business before the next generation even gets a chance to operate it. One way to avoid this mistake is to create a Family Limited Partnership (FLP). An FLP lets you transfer ownership slowly while still maintaining control over the operation of the business.
If you are certain that the business will not be passed down to the next generation, or even as a back-up plan, you should consider entering into a Buy-Sell agreement. Such an agreement ensures that you and/or your family will receive the fair market value of the business when you retire, if you become incapacitated, or after your death.
Do You Need Assistance with Business Succession Planning?
For additional information, please sign up for one of our FREE estate planning webinars. If you need to incorporate business succession planning into your Arkansas estate plan, contact the experienced Washington County, Fayetteville, Springdale, Rogers, Bentonville, and Northwest Arkansas estate planning attorneys at Wilcox Attorneys, PA by calling 479-443-0062 to schedule your appointment today.
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