- Most business transitions are unsuccessful due to failure to address the family dynamic.
- Taking an incremental, evolutionary approach when planning for the succession of a business can increase the chances of a successful transition process.
- It is important to work with experienced professionals to make sure your succession plan is set for long-term success.
Estate planning can be challenging, particularly when a family business is involved. David Leibell, Senior Wealth Strategist at UBS and Chair of the Family Business Advisory Committee for Trusts & Estates Magazine, has over 25 years of experience in planning for this scenario.
“Although about 80% of family business owners would like them to stay in the family, less than one-third make it through the second generation.” Twelve percent make it through the third generation and just 4% through the fourth, according to Leibell.
The disconnect between what 80% of families want and the far bleaker reality is in part due to a failure to plan effectively for issues in family dynamics. With good planning, however, you can beat the odds and successfully pass down your business to your heirs.
Equal ownership of the business among children is not always fair
If you own a business, you may have long dreamt of handing the reins over to your kids when the time comes. But what should you do if only part of the family is active in the family business? This can lead to major conflicts and stress-inducing decisions that most parents would prefer to avoid. As such, the common result is that no thoughtful planning gets done, leaving the kids to fight it out after the parents pass away. The personal and financial results of this approach can be devastating.
Putting together a succession plan that is fair to all members of your family may not be fun or easy, but it is the key to the long-term success of your business and the well-being of your family.
Most parents want to split things evenly among their children. This can be difficult when a business represents the lion’s share of the value in an estate. This creates a conflict between the goals of the children who are active in the business and the children who are not. In an ideal world, the business would go to the active children and the other children would receive non-business assets of equivalent value.
How can this be achieved when the business represents a large percentage of the assets of the estate? The answer will be different for each family, but the general answer is consistent—proper planning by the parents and communication of that planning to the children. In some families, there will be adequate assets outside the business to distribute equally. In others, the parents will purchase a large life insurance policy that pays out to the non-active children. Finally, through the use of a buy-sell agreement drafted while the parents are alive, the active children can buy out the nonactive children’s share of the business at the surviving parent’s death.
Some advisors suggest splitting the business from its real estate, and giving the real estate to the nonactive children. While on the surface this can seem like a fair solution, it should typically be avoided for a couple of reasons.
First, changes in property values or business performance can lead to an outsized result for some children compared to others. Second, problems can arise if the nonactive children decide to sell the real estate, forcing the active children to find another location to operate or perhaps close down the business.
Every business and family is unique
Work with your kids, and a qualified advisor, to make sure everything is set for long-term success. “It’s important to work with people who know what they’re doing. A lot of people say they do, but don’t really know how to do it,” Leibell said.
“When it comes to the family business and succession, the stakes are extremely high,” Leibell adds. Don’t risk your business or legacy by failing to plan or putting a poor plan into place. Working with an expert advisor at UBS can help you reach your goals while staying focused on what’s most important to you.