Spring  2007      Vol. 16, No. 2  REAP HOME PAGE  A publication of the Center for Rural Affairs    
  < NEWSLETTER MENU  5/07      

Transferring Management in the Family-Owned Business
Know your business, your family, and the roles and responsibilities of each to be among the third of family businesses that survive

The family business is a vital force in the American economy. About 90 percent of all U.S. businesses are family owned or controlled. They range in size from the traditional small business to a third of Fortune 500 firms. Family businesses generate about half of the country’s Gross National Product and half of the total wages paid.

The American economy depends heavily on the continuity and success of the family business. It is unfortunate, even alarming, that such a vital force has such a poor survival rate. Less than one-third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation.

Successful Ownership Transfer
At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. Founders are trying to decide what to do. Options are few, and they include closing the doors, selling to an outsider or employee, retaining ownership but hiring outside management, or retaining family ownership and management control.

To be one of the few family businesses that survive transfer of ownership requires a good understanding of your business and your family. Four basic reasons account for the failure of family firms to transfer the business from generation to generation successfully:

  1. Lack of viability of the business.
  2. Lack of planning.
  3. Little desire on the owner’s part to transfer the firm.
  4. Reluctance of offspring to join the firm.

These factors, alone or in combination, make transferring a family business difficult, if not impossible. The primary cause for failure, however, is the lack of planning. With the right plans in place, the business, in most cases, will be able to remain healthy.

Issues in the Family Business
The list below contains the issues that most family businesses face:

  • Participation – who can participate in the family business and under what circumstances.
  • Leadership and ownership – how to prepare the next generation to assume responsibility for the business.
  • Letting go – how to help the entrepreneur let go of the family business.
  • Liquidity and estate taxes.
  • Attracting and retaining non-family executives.
  • Compensation of family members – equality versus merit.
  • Successors – who chooses and how to choose among successors.
  • Strengthening family harmony.

Planning for the Transition
Four plans make up the transition process. By implementing these plans, you will ensure a better chance of the successful transfer of your business within the family hierarchy.

A strategic plan for the business will allow each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company’s future.

The family strategic plan is needed to maintain a healthy, viable business. This plan establishes policies for the family’s role in the business. For example, it may include an entry and exit policy that outlines the criteria for family members working in the business.

A succession plan will ease the founding or current generation’s concerns about transferring the firm. It outlines how succession will occur and how to know when the successor is ready.

An estate plan is critical for the family and the business. Without it, you will pay higher estate taxes than necessary. Taking the time to develop an estate plan ensures that your estate goes primarily to your heirs rather than to taxes.

This abbreviated article was taken from a more in-depth article from the Small Business Administration (SBA) website. We recommend you read the entire article by going to www.sba.gov  – small business planner – exit strategy – transfer ownership.

Contact: Jerry Terwilliger, Panhandle Business Specialist, 308.247.9926 or j414@charter.net .
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