It's not an easy conversation and many put off the nitty gritty of planning and therefore have a cursory knowledge of the steps involved to ensure a smooth transition and minimize tax liabilities.
Regulations on estate transfer and taxes are constantly changing. The National Small Business Association reports on issues vital to small business owners and has a timely article on the recent proposed estate tax rule regarding regulations on minority discount valuations.
This code would make sweeping and significant changes to the valuation of interests in many family-owned businesses for estate, gift, and generation-skipping transfer tax purposes. These regulations will play a factor in your succession planning.
David Scott of WealthManagement.com says that business owners often come to the advisor fully devoted to a set of myths, beliefs and emotions that are almost always counterproductive in the early stages of the process.
In his article, The Myths and Realities of Succession Planning for Small Businesses, he outlines the myths that are almost universal among small business owners and how to address them and the family dynamics that are powerful forces in many small businesses.
Myth #1: There's Plenty of Time
Myth #2: It's Easier to Just Sell It
Myth #3: A Successor Will Be Ready When I'm Ready
Myth #4: Equal is Synonymous with 'Fair'
Myth #5: Giving Up Ownership Means Losing Control and Income
Research by EY, a global leader in assurance, tax, transaction and advisory services, shows that more than 80% of businesses will change hands within 10 years and while 44% of owners say their businesses are totally dependent on them, 62% have not chosen a successor.
Only 3% of all family businesses will make it beyond the third generation. Peter Englisch, Ey's Global Family Business Leader, in his article for Forbes, Succession Planning: Are you planning for Tomorrow, Today?, recommends asking four questions that sit at the heart of every successful succession:
Leadership: have you identified who should lead the business going forward? Are you willing to transfer control?
Ownership: who is going to own the business after you retire? Should the owner(s) always be involved with the company?
Legacy and values: what are the family values? Are you confident the next generation will carry these values forward?
Wealth transition: are there plans on how to share wealth with the family members? How will the owner(s) remain financially secure after transferring the business?
Englisch states that after reflecting on these four dimensions and discussing them with all key stakeholders, you might not have a plan, but you will have the right mindset: focus on the future. This is where your process begins. From here you (and your advisor) can create an independent view of your options, prepare the succession plan and, most importantly, execute it effectively.
So what can private companies do to get started and how should they address existing plans? Deloitte Insights provides an informative series of papers to address these important issues. The series creates a library that can help business leaders identify and overcome the challenges that stand between them and an orderly transition of the management and ownership of their companies.
You will find volumes on The Need for Planning, Establishing a Foundation, Developing Future Leaders, Family Dynamics and Governance, and Cementing a Legacy.
If succession is not an option, the business will need to be wound up or sold. The Balance, a website of financial experts including senior editor Jean Chatzky, provides information on selling or closing your business in their article, Tips for Successful Family Business Succession Planning.
It's never too soon to start your succession planning, especially with ever-changing estate tax regulations and a new incoming administration. Make use of the numerous tools and information available to start planning your business succession.
Tribute, Inc. owner Tim Reynolds is the former Chair of the National Small Business Association - a staunchly nonpartisan organization advocating for America’s small businesses. Click here to learn more about their mission and how to join.