Depending upon the desires of the family, succession planning may involve the sale of the business to outsiders or passing the business on to the next generation. Given the impact of estate taxes, a business owner must either create equity to pay the estate taxes at the time of death or wealth transfer planning must be undertaken during life.
Succession planning with a closely held business creates its challenges because of the inherent nature of such businesses. Typically, a family owned business centers its goodwill around the efforts of a key individual, who is typically the founder. Upon the death or retirement of this individual, the business may lack successor management or the charismatic flavor that has made the business successful.
Other reasons why the business succession fails in the majority of instances usually center around the failure to plan and include procrastination in planning by the business owners, failure to plan for the payment of estate and/or income taxes, failure to arrange for funds to provide for the retirement of the founding member while continuing to support the business in the manner in which it can be successful, reluctance of other family members to come into the business, leaving the business without a successor, and family disputes concerning control or ownership.
When lifetime planning is not done, negotiations may have to be accomplished upon the death or withdrawal of an owner, which may lead to family acrimony. Uncertainty as to the parents’ desires and plans concerning decision-making authority and division of profits may cause emotional issues that cannot be overcome. Death taxes may be incurred which would otherwise be unnecessary, and ownership may have to be transferred to an unsuitable outsider.