Family-owned businesses comprise 35% of the Fortune 500 and contribute 64% of GDP, 68% of employment and 78% of new jobs. Estimates are that 80-90% of businesses in the United States are family-owned, 90% of family-owned enterprises control more than one business and 54% plan to start a new entrepreneurial endeavor. All of these statistics are from the Family Business Institute’s research.
Family firms are female friendly as well: 24% are led by a female CEO and 60% have women in management positions. This compares to the Fortune 1000 companies of which only 2.5% were led by women in 2007.
The mean age of the family business controller is 60.2 years old. And while 40.3% of those entrepreneurs want to retire in 2017, less than half of them have chosen a successor. Only one-fifth have an estate plan despite the majority stating that they are aware of the estate tax impact on their business and family.
For the next generation, one-third say they have no knowledge of the senior generation’s transfer plans and get no updates on ownership. (For related reading, see: How to Create a Business Succession Plan.)
Plan for Family Business Success
The statistics on longevity are quite sobering. According to Family Firm Institute and PWC’s annual family business surveys, only 30% of businesses survive into the second generation, 12% make it to the third generation and just 3% make it to the fourth generation and beyond.
While 88% of family business owners surveyed expect their firm to be viable in the next five years, many are hesitant to take the steps to make sure that the business survives them. Ira Kalb, Professor of Marketing at the Marshall School of Business at the University of California says that too many founders micro-manage the business and fail to delegate or promote leaders so they can step away. (For related reading, see: 6 Drawbacks of Working for Your Parents.)
There are numerous reasons for this failure to plan. All too often, the CEO loves running the business and is afraid if he or she steps away and retires, they are facing the end of their life. No one wishes to face mortality, yet two things in life are certain: death and taxes!
In attempting to create a succession plan, entrepreneurs often make technical mistakes as they fail to seek outside counsel and advice. All too often, they plan in a vacuum, not recognizing changing markets and tax impacts. Too many make the mistake of leaving the business to the surviving spouse who may have never actually worked in the business. The big elephant in the room is how to treat all the children and other heirs equitably.
Create a Legacy
While each family has specific issues and challenges unique to their family and business, the process to create a legacy and increase the odds for success in transferring ownership to the next generation is similar. One must start with a vision of what both the current generation and upcoming generation have for the family business.
After vetting out the vision, governance is the next critical step. Creating a short and long-term strategy for ownership, roles of family members, any outside shareholders, and how to treat family members who choose not to work in the business are critical pieces to the governance criteria.
Bringing in outside advisors helps orchestrate the process. An outside advisor can help lead meetings, set agendas, open discussion points, inform the family of both income and estate tax consequences and help keep the plan in motion to completion. (For related reading, see: Do Small Business Owners Need Financial Advisors?)
So make it a goal to tackle this issue to help your family be in the minority of those businesses with a formal succession plan!