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Wealth Planning Advisory 1Q18

The Human Element: An Integral Part of Family Business Succession Planning

Family businesses play a big part in the U.S. Economy. According to The Small Business Administration, more than 90% of all businesses operating in the U.S. are family-owned. Family businesses are responsible for 78% of the new jobs that are created. Yet, the tragedy is that less than one third of the businesses owned by families survive the transition from the first generation to the second generation. The failure rate increases dramatically for transitions beyond the second generation.

There are numerous factors that must be considered in order to successfully transition a family-owned business to future generations. One of the key factors often overlooked is the human element.

The human element can take several forms, depending on the dynamics of each family. However, in general, the human element can include any of the following:

  1. Sibling Rivalry. Rivalry can frequently occur when siblings working in the family business are vying for successor management of the business. As a side issue, riffs between siblings can also be caused or intensified by in-laws.
  2. Active and Passive Owners. Conflict can arise as a result of family owners working in the business and family owners outside of the business. For instance, owners working in the business will generally want to use revenues to reinvest in the business. On the other hand, owners outside of the business tend to want distributions from the business to fulfill their financial needs.
  3. Family Members with Unequal Number of Descendants. Tension between family members can occur if one family member has more descendants than other family members. The family member with more descendants might seek a greater share of the business profits.
  4. Reluctance of Current Family Members in Control to let go. It is quite common for senior family members in control to be reluctant to give up that control even if other family members have the knowledge, ability, and willingness to take over the management of the family business. This can lead to junior family members becoming tired of waiting for their shot to manage the business, and they simply decide to walk away from the business. Consequently, a business can be left with no competent and experienced family members to take over the management.
  5. Divorce. With a divorce rate of over 50% in the U.S., divorce is a real threat to family businesses. Depending on the state and the surrounding facts, a business asset can be considered a community property asset or a marital asset that is subject to division upon divorce. In that instance, the family business could end up with an unwanted owner, a former spouse.

This Planning Advisory is not intended as tax or legal advice. Also, it is not intended to offer penalty protection or to promote, market, or recommend any information contained herein. Before acting on the information in this Planning Advisory, a competent professional should be consulted.