Did you know that the number one reason why small family businesses fail is because of lack of planning? Only one third, 34%, of all small businesses have a robust, documented succession plan. One of the main reasons that business owners fail to plan is because they’re too busy working in their business and they don’t take the time to work on their business.
You see, when it comes to family businesses, a lot of times they’re already established by the time the second generation gets there. So they assume it’s going to be there forever, but without the proper planning, that may not be the case.
Proper succession planning is the key to pass the family business from one generation on to the next.
I’d like to share an example of a local business that failed to do the planning. The business was in its third generation. The founder of the business never did any succession planning, and when he passed away unexpectedly, all of his ownership passed to his wife, who was not active in the business. He had two sons working diligently in the business, who in fact, were growing the business. And he had a daughter who was not involved in the business at all.
The mom never got around to doing any proper planning as well. And when she died, the boys had to pay over $8 million in federal estate taxes in order to gain ownership of the business. Now, as bad as that sounds, additionally, they had to come up with another $3 million to buy out the sister’s share in the business.
They borrowed $11 million and things were humming along fairly well until the 2008 financial crisis hit, and at that time their business basically evaporated. They had very little sales and certainly no revenue coming in, and ultimately they defaulted on the bank loans. The business ultimately went bankrupt. And not only did the two brothers lose their livelihood, but they had 150 employees who also lost their livelihood.
This perfectly underscores the importance of proper succession planning. A business succession plan is there to lay out exactly what’s going to happen when. Whether the owner dies, becomes disabled, or simply wants to retire. It’s a way to pass the business down from one generation to the next and make sure it’s a smooth transition.
A properly documented business succession plan is known as a business owner’s will. It literally addresses the transfer of the business and the business assets.
If you’re at the point in your business where you’re starting to think about how to exit the business and what’s going to happen and what you want to have happen at your death or disability, and you’d like to start with a business succession plan, be sure to visit our website at tier1capital.com to schedule your free strategy session today. We’d be happy to guide you.
Or if you’d like to learn more about how to smoothly make this transition for your business and your family. Check out our Free Business Owners Guide on our website.
And remember, it’s not how much money you make. It’s how much money you keep that really matters.