“Often a defining characteristic of family businesses is the desire to ensure the business stays in the family across the generation. However, this – many times – is not the case often due to a lack of planning,” says Daniel Geltrude, Managing Partner of Geltrude & Company and Director of the firm’s Family Office Practice. “Even when quality succession plans are put in place, we find that it’s not usual for the family members to push them off. Basically, sometimes there’s a lack of follow through.”
In a survey of 336 senior level family members running their family businesses, about half of them identified succession planning as being a major concern. Only about a quarter of these firms have formal succession plans in place. In those family businesses without formal succession plans the principal reason not to have a formal succession plan is that it will cause family conflicts. A number of hard decisions regularly have to be made and it’s often easier to avoid making such decisions.
Among the other half of the family businesses who are not concerned, two in five of them have formal succession plans in place. Again, potential family disharmony is a major factor for not dealing with this matter.
Very telling, is that the second generation family businesses are more inclined to have formal succession plans than the first generation family businesses. “We find that when the experience of passing the business to the next generation is fraught with problems, the family members in charge are motivated to make sure the transition goes as smoothly as possible in accord with their wishes,” says Frank Seneco, President of Seneco & Associates, an advanced planning boutique and author of Maximizing Personal Wealth: An Advanced Planning Primer for Successful Business Owners. “They want to avoid the pain and mistakes they were saddled with when they took over.”
As part of a well-orchestrated succession are mitigating taxes on the transfer of the family business to heirs. The problem is that – based on the judgment of the survey respondents – only about a third of the family members with significant equity ownership have up-to-date estate plans. “Lacking estate plans that are current can possibly result in the heirs of family businesses having to pay taxes that could otherwise have been avoided or been made a lot less onerous,” explains Pat Rufolo, founding member of Rufolo & Associates a nationally recognized estate planning law firm, “There are numerous cost-effective advanced planning strategies that can be used to make the transfer of the family business highly tax efficient as well as meet the often diverse needs of the family.”
It is a common and all too often repeated conclusion… a large percentage of family businesses are not taking formal concerted actions to transfer the family firm to the next generation. The consequences are frequently highly detrimental to the success of the firm and the wealth of the family.