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Liquidating the family business in order to pay estate taxes is often an unpleasant reality for families of individuals who die without wills ( intestate ) or estate plans. If you own a family business, you should consider taking steps now to help assure one of your most valuable assets will still be around for your children, grandchildren, and beyond.
The terms "family business" or "small business" can be misleading, especially when you consider the impact these businesses have on the U.S. economy. According to a recent estimate by The Family Business Institute, there are around 24 million family-owned businesses in the United States. These businesses generate 64% of the gross national product (GNP) and employ approximately 82 million people (62% of the workforce).
It is natural to assume that many business owners would like to keep this kind of influence in the family. However, in reality, the situation is much different-only a fraction of business owners who want their family business to remain in the family take active steps to devise a formal succession plan .
Why is it that only a small number of business owners act on their intentions? Because business continuation is often a difficult subject for family business owners to confront. In many cases, succession is often avoided, rather than planned. It is often a taboo topic.
Business owners may be reluctant to hand over a business they spent much of their lives building. They may be forced to confront and resolve sibling rivalry and other unpleasant family disagreements. Sometimes, an owner will have greater difficulty grooming a family member for succession because of the overlap of family and business boundaries. Additionally, if the owners plan to rely on the family business for retirement income, they may worry about the business's success under new owners.
However, the costs of not planning for the continuation of family businesses may be enormous. Often, companies without formal succession plans are courting disaster. According to recent data from the Family Firm Institute, while more than 30% of all family-owned U.S. businesses survive into the second generation, only about 12% are passed onto the third generation.
How can you make sure that your business will survive for successive generations? A sound solution is to establish an estate plan. Simply put, you need to do the following:
Develop a formal management succession strategy that will help ensure your business stays in the family after your death.
Equalize your estate so that if you have children, you can make alternative bequests to those who do not want to be involved with the family business. At the same time, you can leave the business to the children who do wish to be active in the business.
Guarantee that the business continues in an orderly manner after your death.
Create a buy-sell agreement for family and non-family members who may own stock in your business.
As you can see, ensuring that your business lives on is a complicated issue that engenders many concerns. Care must be taken to ensure that all issues will receive open and honest discussion. With the right estate planning team and the right succession plan in place, you may be able to beat the odds to maintain your company's success and ensure your family's ownership for future generations.