A March 2012 article by Julius Giarmarco, published in the Journal of Financial Service Professionals, divides business succession planning into three main issues: management succession, ownership succession, and transfer taxes. He argues that is it important to discuss management succession separately from ownership succession and that the issue of taxations on the transfer of wealth across generations is so critical that it needs to be addressed separately.
We have already discussed how to plan for an effective family business succession in terms of management succession. We turn next to the latter two steps in the succession process.
As the family numbers grow, while only a few of the family members will end up having a leading responsibility in the business, ownership may increasingly become divorced from management, with all the negative consequences that it implies. The most visible one is that owners privilege dividends, while managers privilege business growth.
Ways to overcome this problem include selling the business to the more active children while leaving the remainder of the wealth to the other family members (in a family trust for example), or creating a voting /no voting structure to ensure effective control by those family members deeply involved in the business.
In any case, the family business leaders should prepare for the issue of alignment of ownership and management, which was obvious and easy for the first generation, but becomes a challenge for the second and subsequent generations – a challenge compounded by the often fast growth in family members and family complexity.
The issue of taxation on inheritances or selling of the business is fundamental as, many times, a large amount of the proceeds may be liable for tax payments.
Sometimes a family business may need to be liquidated for the family members to be able to pay the tax owned on the inheritance of the business. This issue is very difficult to deal with because not only is the fiscal regime different in every country, but it also changes frequently.
Getting expert tax advice is key, as well as long-term planning, as some solutions are only tax efficient if prepared and implemented over many years. Creating a relationship with a trusted advisor than can quickly deploy tax expertise is an important asset for the family business.
Overall, planning for your succession is one of the most important responsibilities of an entrepreneur who has created a family business. Despite its importance, it is often a neglected task that keeps being delayed, to the frustration of the next generation and the endangering of the business.
Family business owners should think deeply about it, compare experiences, and gather expertise. They should be pro-active about succession and transparent about the process, making this a statement of their desire to build a lasting family business with the productive involvement of the next generation.
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