By John A. Wenstrup
Owning your own business is a highly cherished American dream and a most respected product of the free enterprise system. While a family-owned business can provide remarkable financial benefits, capital growth, healthy salary, generous fringe benefits and the like, the real benefits are often more intangible. A family-owned firm can provide a more personal working scenario than a larger impersonal company. Family members take pride in seeing their family name on the sign on the door and on the products and services that go out that door. The best family firms set high expectations for personal service and customer loyalty. These businesses are often inseparable from the continued health and welfare of their local community.
Family business entrepreneurs usually hope that their business will remain within the family. When members of the founding generation retire, with proper business continuation plans in place, the founders can have confidence and take pleasure in knowing that the firm is in good hands. However, according to a study by the Journal of Accountancy, fewer than half of family businesses survive past the second generation.
Challenges to Keeping the Business in the Family
No qualified or interested family member: Some firms do have an employee who could run the business, but that person is not a family member. Perhaps the children are too young, have other interests, or lack the founder's drive, feel for the market, or technical skills.
Limited access to capital: A family member may not have the same relationship with the bankers, suppliers, bonding company, and customers as the prior generation.
Death, disability, or retirement: Senior management may leave, whether through death, disability, or retirement, before the next generation is prepared to assume control.
Disgruntled second-tier management: A senior employee who has given his or her life to a company may find it difficult to work for a "boss" young enough to be his or her child. First-rate salaried managers often leave to become the next generation's most potent competitors.
Current income versus growth of firm: While the retired generation may be reasonably concerned about income, the children may desire to retain profits to grow the business.
Estate taxes: A closely held corporation is an illiquid asset. Taxes are assessed based on "fair market value" at a date of death. Often, however, there are no willing buyers, so other assets, or even the firm itself, may have to be liquidated to cover the estate taxes due.
Family differences: The eldest daughter has an aptitude for business, but her husband has transferred to another place. The son wants to run the business, and lives in town, but has so much to learn. How are business owner/parents to do what is right for each child, and the business?
The solution is talking about it now with someone who can help you sort it all out. We can do that! Our commitment to be your advocate means better communication and execution, and a deeper, broader relationship for you with us.
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The Wealth Alliance does not provide tax or legal advice. Tax laws are subject to change.
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John A. Wenstrup is a Chartered Financial Consultant and president of The Wenstrup Company. John specializes in retirement, wealth transfer & business succession planning. |
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