If you're planning to keep your business in the family after you retire or pass away, there's more to it than grooming a successor. Your heirs' desire to run the business, their leadership capabilities, and technology and cultural changes should influence the decision. In addition to those factors, though, you need a succession plan that won't damage the business as it changes hands.
According to Harvard Business Review, 70 percent of family businesses fail before the second generation takes over, and just 10 percent survive to a third generation. While the stats will vary from industry to industry, there are many universal items to consider as you draft a succession plan for your heirs.
Questions to ask before creating your plan
- Will a single child inherit the business or will you divide among heirs?
- Will you appoint a majority heir or strive for fairness? Will this create tension?
- Is your business big enough to support multiple heirs and their families?
- Will the transition itself be a financial burden?
- Should you transfer the business directly to your heirs, or through a trust?
Managing the succession plan
The first step is determining who gets what. Once this is decided, the goal is to create a seamless transition that won't hurt the business while also handing over control in a cost-effective way. Timing and tax structures need to be addressed.
In any business succession, there are income taxes, gift taxes and estate taxes to manage. Whether you choose gradual gifting over time, a buy-sell agreement, annuity trusts or family limited partnerships, there are many options. Each has unique distinctions to help match the payment plans, tax bills and timing that fits your family.
Finding the right option
There is no template for passing a family business from one generation to the next but, as the Harvard Business Review points out, it's a uniquely challenging task to get right. While there isn't an easy answer, Tennessee law provides many options to spread out the cost and reduce taxes. An experienced estate planning attorney will be able to advise about specific trusts and other succession plans that will carry out the vision for your business while helping your heirs to take over its management and continue the legacy.