Family Owned Businesses – The Planning Process
Strategic planning—centering around both business and family goals—is vital to successful family businesses. In fact, planning may be more crucial to family businesses than to other types of business entities, because in many cases families have a majority of their assets tied up in the business. Since much conflict arises due to a disparity between family and business goals, planning is required to align these goals and formulate a strategy for reaching them. The ideal plan will allow the company to balance family and business needs to everyone’s advantage. Unfortunately, Nation’s Business reported that only 31 percent of family businesses surveyed in 1997 had written strategic plans. There are four main types of planning that should be conducted by family businesses: family planning, business planning, succession planning, and estate planning.
FAMILY PLANNING
In family planning, all interested members of the family get together to develop a mission statement that describes why they are committed to the business. In allowing family members to share their goals, needs, priorities, strengths, weaknesses, and ability to contribute, family planning helps create a unified vision of the company that will guide future dealings.
A special meeting called a family retreat or family council can guide the communication process and encourage involvement by providing family members with a venue to voice their opinions and plan for the future in a structured way. By participating in the family retreat, children can gain a better understanding of the opportunities in the business, learn about managing resources, and inherit values and traditions. It also provides an opportunity for conflicts to be discussed and settled. Topics brought to family councils can include: rules for joining the business, treatment of family members working and not working in the business, role of in-laws, evaluations and pay scales, stock ownership, ways to provide financial security for the senior generation, training and development of the junior generation, the company’s image in the community, philanthropy, opportunities for new businesses, and diverse interests among family members. Leadership of the family council can be on a rotating basis, or an outside family business consultant may be hired as a facilitator.
BUSINESS PLANNING
Business planning begins with the long-term goals and objectives the family holds for themselves and for the business. The business leaders then integrate these goals into the business strategy. In business planning, management analyzes the strengths and weaknesses of the company in relation to its environment, including its organizational structure, culture, and resources. The next stage involves identifying opportunities for the company to pursue, given its strengths, and threats for the company to manage, given its weaknesses. Finally, the planning process concludes with the creation of a mission statement, a set of objectives, and a set of general strategies and specific action steps to meet the objectives and support the mission. This process is often overseen by a board of directors, an advisory board, or professional advisors.
SUCCESSION PLANNING
Succession planning involves deciding who will lead the company in the next generation. Unfortunately, less than one-third of family-owned businesses survive the transition from the first generation of ownership to the second, and only 13 percent of family businesses remain in the family over 60 years. Problems making the transition can occur because the business was no longer viable or because the owner or his or her children did not want it to occur, but usually result from a lack of planning. At any given time, a full 40 percent of American firms are facing the succession issue, yet relatively few make succession plans. Business owners may be reluctant to face the issue because they do not want to relinquish control, feel their successor is not ready, have few interests outside the business, or wish to maintain the sense of identity work provides.
But it is vital that the succession process be carefully planned before it becomes necessary due to the owner’s illness or death. Bowman-Upton recommends that family businesses follow a four-stage process in planning for succession: initiation, selection, education, and transition. In the initiation phase, possible successors are introduced to the business and guided through a variety of work experiences of increasing responsibility. In the selection phase, a successor is chosen and a schedule is developed for the transition. During the education phase, the business owner gradually hands over the reigns to the successor, one task at a time, so that he or she may learn the requirements of the position. Finally, the transition is made and the business owner removes himself or herself from the daily operations of the firm. This final stage can be the most difficult, as many entrepreneurs experience great difficulty in letting go of the family business. It may help if the business owner establishes outside interests, creates a sound financial base for retirement, and gains confidence in the abilities of the successor.
ESTATE PLANNING
Estate planning involves the financial and tax aspects of transferring ownership of the family business to the next generation. Families must plan to minimize their tax burden at the time of the owner’s death so that the resources can stay within the company and the family. Unfortunately, tax laws today provide disincentives for families wishing to continue the business. Heirs are taxed upon the value of the business at a high rate when ownership is transferred. Due to its complexity, estate planning is normally handled by a team of professional advisors which includes a lawyer, accountant, financial planner, insurance agent, and perhaps a family business consultant. An estate plan should be established as soon as the business becomes successful and then updated as business or family circumstances change.
One technique available to family business owners in planning their estate is known as “estate freeze.” This technique enables the business owner to “freeze” the value of the business at a particular point in time by creating preferred stock, which does not appreciate in value, and then transferring the common stock to his or her heirs. Since the majority of shares in the firm are preferred and do not appreciate, estate taxes are reduced. The heirs are required to pay gift taxes, however, when the preferred stock is transferred to them.
A variety of tools are available that can help a business owner defer the transfer taxes associated with handing down a family business. A basic will outlines the owner’s wishes regarding the distribution of property upon his or her death. A living trust creates a trustee to manage the owner’s property not covered by the will, for example during a long illness. A marital deduction trust passes property along to a surviving spouse in the event of the owner’s death, and no taxes are owed until the spouse dies. It is also possible to pay the estate taxes associated with the transfer of a family business on an installment basis, so that no taxes are owed for five years and the remainder are paid in annual installments over a ten-year period. Other techniques exist that allow business owners to exclude some or all of their assets from estate taxes, including a unified credit/exemption trust, a dynamic trust, and an annual exclusion gift. Since laws change frequently, retaining legal assistance is highly advisable.