Will Your Business Die With You?
Originally published: 06.01.06 by Mike Coyne
Strategies for leaving your company to family members.
My sonand I have worked side by side in the family business, and due primarily to hisefforts the business has more than tripled. This business is my major asset andI plan to leave it equally to both of my children. My son says that if I planto leave the business (which he built) equally to him and his sister, then hewill quit and become my competitor. He said he doesn't want to spend a lifetimebuilding a business which will be half owned by his sister.
The abovescenario is so very common. Approximately 90% of the businesses in the United Statesare family owned. Unfortunately, studies show that 2/3 of family businessesfail to survive into the second generation. Although owners often spend alifetime building their business, many neglect to plan for its transfer to theirsuccessors. This failure to adequately plan for management and ownershipsuccession is a leading contributor to the low survival rate. Many peopleequate succession planning with estate planning. Others believe it is anotherform of strategic planning. Neither view is entirely accurate, although estateplanning and strategic planning are integral parts of any business successionplan. Succession planning is much broader. It is the development of a strategyfor the transfer of the ownership, management, and philosophical responsibilityof the business, typically from the parents to their children.
A businessowner with several children may face toilsome decisions, especially whenownership of a business represents the bulk of the owner's estate and some ofthe children are active in the business while others are not. In such cases,the goal of the owner is usually to transfer the business to the children whoparticipate in the business without being unfair to the other children. It maytake considerable planning to achieve a fair and equitable distribution of theowner's assets among the children in such situations. The owner may also befaced with a situation where all the children are active in the business or allchildren are inactive.
Most parentswant to treat each of their children fairly when dividing up their wealth.Often, they equate fairness with an equal distribution of their property amongtheir children. Providing an equal distribution of property to each child maybe difficult to achieve when the bulk of their estate is comprised of a closelyheld business.
Faced withthe competing goals and interests of the business owner, surviving spouse, andeach of his or her children, there are many transfer options available, such astransfers of existing non-business assets, transfer of other business assets,use of life insurance to equalize overall transfers, re-capitalizations,installment sales, spin-offs, and gifting plans, to name a few. Most often suchplanning takes the coordinated efforts of the business owner, his or herfamily, accountants, financial planners, insurance agents, and of courseattorneys. Be sure to adequately plan. Don't make a hasty decision that couldcause a rift between your children (and possibly grandchildren) for many yearsto come.
MichaelP. Coyne is a founding partner of the law firm, Waldheger Coyne, located inCleveland, Ohio.Mike's practice focuses on business and tax planning for closely-heldbusinesses and professional practices, as well providing legal counsel onqualified retirement planning, mergers and restructuring. For more informationon the firm, visit www.healthlaw.com,or call 440-835-0600.
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