Considerations for family or closely held Business Clients

Those who practice in the area of estate planning have no doubt heard of the significant transfer of wealth that will occur over approximately the next 50 years. A large portion of that wealth transfer will include the transfer of family businesses. Accordingly, family business succession planning may become an increasing part of an estate-planning attorney's practice, or at a minimum an important topic of discussion.

There are some startling statistics about the viability and succession of family businesses. Often-cited statistics reflect that only about one-third of family businesses survive to the 2nd generation, and barely 10% make it to the 3rd generation. The cited causes for this failure rate are lack of succession planning, poor communication between generations, and inadequate preparation of the next generation.

The American Family Business Survey (conducted by MassMutual Financial Group, Kennesaw State University and Family Firm Interest) (''Survey'') reveals some interesting results.

In the Survey, almost one-third of the business owners (31.4%) had no estate plan other than a will. This does not speak well to the devastating effects estate taxes may have on the prospects of the family business. However, the recent increase of the Estate Tax Exemption to $5,000,000, as adjusted for inflation ($5,250,000 for 2013) may ameliorate this issue for some family businesses.

Beyond the estate planning issues, a significant number of the business owners who actually planned to retire within 10 years had not selected a potential successor for the business, again jeopardizing the stability and future success of the business. Another interesting statistic was that almost a third (30.5%) of the business owners had no plan to retire, ever; and 29.2% reported that retirement is more than 11 years away. With the median age of the current business owners being 51 at the time, this means that many owners plan to die in office, which would not be beneficial to the family, the firm, its employees and its clients.

The Survey also inquired who is the most trusted advisor of the family business owners. The 2007 Survey answer was the owner's spouse, followed by the accountant, business peer, parent, lawyer, and financial services advisor. Compared to the American Family Business Survey conducted in 2002, the attorney fell from a rank of 2nd as the most trusted advisor to 5th in 2007. Therefore, the status of the attorney as a most trusted advisor has fallen over that 5-year period. Consider how this perception impacts the role of the attorney in advising business clients, especially in the area of succession planning. I believe that an attorney is the best-suited advisor to counsel clients with all aspects of estate and succession planning.

In counseling and advising family business clients, consider reviewing the following issues with your family or closely held business clients:

* The business owner's personal goals and vision for the transfer of ownership and management;

* Is a successor identified and ready?

* The importance of family involvement in leadership and ownership of the business?

* Has the family business owner communicated his or her vision, values, expectations and long-term plans related to the family, business and ownership?

* The business owner's liquidity needs and source of retirement cash flow needs, especially as it may relate to reliance on the business;

* The value of the business, especially any recent valuations conducted;

* Is there a current agreement among the owners of the business, such as a stockholder's agreement, buy-sell agreement, operating agreement that is consistent with the succession plan?

* The business owner's preferences as to the transfer of ownership of the business, such as timing and nature of transfer (gift, sale or a combination).

This list is not intended to be exhaustive of the appropriate topics and discussions that should be considered for a business owner. However, consideration of these issues represents a good starting point toward the development of a business succession plan. Above all else, given the failure of business owners to plan for the succession of their business, and develop appropriate estate and succession plans, it is never too early to begin such discussions, and be persistent.

Published: Thu, Aug 1, 2013

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