Family owned businesses form the backbone of American enterprise, but surveys of small business owners reveal that little or no planning for survival of the business to the next generation has been accomplished. The importance of family owned business is evident from statistics which reveal that over the past decade, all net job growth in the United States has occurred in businesses with 20 or fewer employees. Estimates from the Internal Revenue Service suggest that 95% of U.S. corporations are closely-held and that they account for over one-half of the gross national product along with 50% of the total wages paid.

While nearly 70% of the family owned or closely-held business owners express the desire to have the business remain under family ownership, less than 1/3 of business owners have established formal business succession plans. Children frequently come into the business with inadequate skills or training, as nearly 85% of the children of family business owners become involved in the family business directly from school without obtaining other work experience. With these statistics, it is understandable that only 35% of family businesses pass successfully to the next generation and less than 13% of these businesses stay in the family for a period in excess of 60 years. For family owned businesses to accomplish successful transfer to the next generation, appropriate planning is essential.


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.

A proper business succession plan will provide for the survival and continuity of the business. It should minimize income and estate taxes, and it should also promote family relations through the fair treatment of all the children and identification of the expected decision-making process.

The first step in formulating a successful family business succession plan is to assemble the succession planning team. In addition to the appropriate family members, professional services of your attorney, accountant, financial planner, and insurance professional is required. Each team member brings different knowledge and expertise to the table. Participation of the family is of utmost importance to identify the planning goals of the family. These goals form the crux of the planning, and may include such issues as the maintenance of jobs for children, holding on to managerial control, or the transfer of control to specific family members. The establishment of the goals provides the highway upon which the planning team will travel.

A thorough analysis of the status of the business needs to be undertaken, including historic financial documentation. Legal documents must also be reviewed, including Shareholder and/or Partnership Agreements, Employment Contracts, Articles of Incorporation, IRS elections, Marital Property Agreements, Wills, Trust Agreements, and Deferred Compensation Agreements. Estate and wealth transfer taxes need to be projected and planned for. Once the succession team has identified the plan, it needs to be shared with the family and then implemented.