Family-owned companies are the backbone of the United State's economy. An article written for the Small Business Administration on transferring family business management estimates that 50% of the GDP of the United States and over half of the wages come from family businesses. Family-owned entities make up close to 90% of the businesses in the U.S.
Unfortunately, most family businesses do not stay intact past the initial generation of ownership. Without proper prior planning, most family businesses fail or are liquidated more often then they are transferred to the next generation.
Business insurance and proper planning can help insure that the business passes from one generation to another smoothly.
- Passion for the business and trust between family members and advisors were cited as the two most important critical success factors by current family business owners. If the owner is entrusting key elements of the business to family members only because they are "family" and not because of 100% trust, problems will develop.
- As with any venture, there are advantages, including control and work-life balance. But those advantages come at a price, such as more stress, fewer vacations and potential disagreements with family members, according to survey respondents.
- Communication is key. Respondents said that communication is one of the top elements to success because it helps maintain good relationships with family both in and out of work and leads to effective decision-making.
- Decide who's the boss. Clear definition of roles and responsibilities is critical.
- Decide how to decide. Respondents said a decision-making and disagreement-resolution process is critical to avoid arguments that can stymie the business and hurt morale.
- Strike a balance. It's easy to get consumed by work demands and to let them invade family life.
- Divorce-proof the business. Regardless of whether the business is owned by a husband and wife team or not - a partner's divorce from a spouse uninvolved in the business can still have disastrous consequences. Of the 15 percent of respondents whose businesses had experienced divorce, 44 percent had a negative experience. More than a third of respondents have never given the possibility of divorce and its impact on the business any thought. A good insurance professional, in conjunction with proper legal counsel, and open and frank discussion in advance is a must for all family business owners.
- Who's next? The insurer's survey found that most family business owners have inadequate or inflexible succession plans. While most (56 percent) are worried about how a death would affect their business, and nearly half are worried about how a disability would affect their business, many either have no succession plan in place (41 percent) or have a plan in place that they consider to be inflexible (47 percent.) Proper succession planning is a must. Consider key man insurance, life insurance, business overhead insurance,and legal agreements such as a buy-sell or option agreement to clarify succession and to provide protection from sudden death or disability of key family members.
- Most respondents (65 percent) say they don't think a legally-documented buy-sell agreement is necessary, even though such agreements can be an effective way for owners to smoothly transition the business to the next generation while also preserving their own retirements.
- More than a third of respondents (38 percent) have no plan in place to deal with estate taxes, which can hurt a family's ability to continue the business and can also erode inheritances.
Family business planning is a tough proposition. One must discuss death, taxes, disability, arguments, and divorce with loved ones and that prospect is never easy. But, business failure and dissolution occur in family businesses without proper advance planning. Work with your insurance professional to guard against that risk.