The current global economic maelstrom, leaving no business unscathed, has caused many of our clients who are business owners to reflect (and inquire about) the key ingredients that it will take to enhance the chances of successfully transferring their businesses to the next generation. This is not some theoretical debate about the importance of family enterprises and how they will survive (and thrive) as it has been widely noted that between 70 and 90 percent of the global GDP was accounted for by family businesses. These same findings suggest that family businesses will remain the cornerstone of the worldwide economy.
Notwithstanding their importance to our domestic economy, there are some disturbing statistics that trust and estate attorneys are keenly aware of as we become more attuned to servicing the needs of our high net worth clients and their business enterprises. Many family businesses face threats to their continued success not from outside their family business spheres, but from within. According to a recent survey of family businesses in the United States and abroad, approximately one in four businesses surveyed anticipated changing ownership within the next five years1. More than half of these businesses will be transferred to junior members of the current owners’ families2. Yet, nearly half of all the companies surveyed have no succession plan in place and an additional one-third of those companies have incomplete plans3. This failure to have some type of succession plan integrated into a family’s business model can seriously impair the best of plans.
It is no wonder that family estate litigation is precipitously on the rise. Mix any one of these above noted statistics together and you have a “perfect storm” for family infighting.
The lack of planning in others aspects of a family business are equally troubling. Seventy percent of the businesses surveyed expect a family member to assume key senior management roles, but less than half of these companies have chosen a successor4. Companies that delay selecting and educating a successor risk having an ill prepared family member thrust into a leadership role or, worse, having no successor named, leaving family members to fight over who will lead the company. The sooner the future leaders are selected and trained, the greater the likelihood that they will succeed. Preparing successors to lead should begin well before the change of leadership takes place.
Beyond issues of ownership and management, a high percentage of family businesses have failed to appreciate valuation issues and how they impact the entire transition process. The valuation of a family business is vital to helping different professionals integrate their ideas and plans to help a family successfully transition a business to the next generation. A business owner’s failure to appreciate the subtle complexities of the methodologies of the valuation process will only enhance the risk of exposing business interests to large and unforeseen tax liabilities.
Finally, a surprisingly small percentage of companies have an internal conflict procedure in place5. The intersection of family and business that family businesses create often leads to conflicts in one sphere of life to seep into the other. If this happens, it has the potential to cause severe damage to both. An internal conflict policy, while not a guarantee of peace and tranquility in family and business affairs, does help to keep these conflicts in check and provides an equitable means to resolve such disputes.
It goes without saying that there are several key advantages family owned businesses possess which provide them with greater stability during these tumultuous times. Family businesses tend to have a longer term perspective and are not subject to the whims of investors and other outsiders. The ownership and control are usually vested in the hands of the same people rather than the wide divide that sometimes exists between those who own and control publicly traded businesses. Family business owners also have a stronger identity with their enterprises and share the same values and objectives as their fellow owners.
All of these “headwinds” that family businesses are encountering today are, with thorough planning, manageable. Dealing with these issues requires law firms, like Smith, Gambrell & Russell, LLP to deliver integrated services in a number of different areas including corporate planning, estate planning and maybe family philanthropic planning (trusts and estates and estate planning seem duplicative). Every wealth creator and those that follow must ultimately ask the question: “What will my legacy be?”
Remember, in what state of organization you leave your wealth (and family business) is as much a reflection of who you are as how you earned it, and will likely be remembered a lot longer.
1. “Making a Difference-The PricewaterhouseCoopers Family Business Survey 2007/08”, p.26.
2. Id. at p.27.
3. Id. at p. 28.
4. Id. at p. 29.
5. See Id. at p. 43.
Authors: Roy P. Kozupsky and Michael C. Levy