Family Business

To begin a succession plan, get the family involved

CorrespondentSeptember 11, 2011 

I was invited to attend the annual Independent Garden Center Show in Chicago a few weeks ago, and to present to a group of family businesses.

While my presentation was a general survey of family business dynamics and best business practices, there were two questions that sparked a great deal of discussion.

One man in his early 60s had a fairly complex family business situation but had not done any succession planning. After hearing about such a broad range of topics, he seemed a little overwhelmed. Thus his question: "Where do I start and is there a list of questions to ask?"

This is always a concern with the leader of a family business who really has not started the planning process

In my experience, the best place to begin is to simply declare to the family that you are going to begin.

Call a family meeting, close the door, and simply state that the company and the family need to begin thinking and talking about preparing for the future of the business. Yes, you have opened Pandora's Box, but better you than someone else.

Get input

But the other critical piece is to include the family. I met a family business leader at a conference a few years ago and he explained to me that he had constructed the ideal succession plan for his family business. When I asked him what the other family members thought of the plan, he told me he had not told them yet. When I suggested he include them in the process, he said there was no need as he had already come up with the perfect plan.

I didn't have the opportunity to follow up with him, but I think it is safe to say that he had a rocky road ahead of him.

As for what questions to ask, I had to resort to the classic Harvard Business School answer: It depends.

The concerns facing a large, poorly performing family business with a number of family members not working in the company are not the same as a smaller, high-growth family business with highly skilled family members working in the business. One size does not fit all.

The answer here is to dig a little deeper to understand the real issues, and to gather input from all the key stakeholders. Armed with this information, you can seek out the answers useful for your particular family business situation.

Understand the taxes

The other question that generated a lot of discussion came in the form of optimizing taxes in the transitioning of the business. It is hard to answer this question without understanding the specifics, but everyone should be aware of the potential impact of the end of the Bush tax cuts.

Currently the tax code allows an estate to pass $5 million per person or $10 million per married couple tax free. Over that, the tax rate is 35 percent. The last time the tax rate was this low was 1931, and it increased to 45 percent the next year as a means of coping with the Great Depression.

It was as high as 77 percent from 1942 until 1976. But on Dec. 31, 2012, about 450 days from now, the Bush tax cuts revert back to 2001 levels of $1 million exemption and 55 percent for anything above that.

Certainly the government can change this law. But with the current U.S. debt to GDP ratio at 93.2 percent, higher than it has been since World War II when an extraordinary amount of money was being spent, and on the rise, do you think the exemption will remain so generous and the tax rate so low? Are you willing to bet the family business?

Family businesses need to be considering passing some, if not a lot of, ownership of the business to the next generation before the end of 2012. But in order to lay this out effectively, the future leadership structure and business strategy of the family business should be understood. Trying to work this out can easily raise a whole host of other questions.

On a day like today, certainly we are reminded of the need to prepare for the future, especially for the ones we love.

Henry Hutcheson is a nationally recognized family business speaker, author and consultant with ReGeneration Partners in Raleigh.

henry@regeneration-partners.com

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