Developing Succession Strategies A High Priority for Family Businesses Around the World

Developing  Succession Strategies A High Priority for Family Businesses Around the World. As more surveys are completed about family businesses, it is becoming possible to compare family businesses in different countries.

Some recent examples:

  • A recent survey of 200 family business owners in more than 20 countries shows 65% saying the company’s management should remain in the family’s control in future generations. The survey, conducted by the International Institute for Management Development (IMD) in Lausanne, Switzerland, found that, “The tendency to prefer a ‘family solution’ for managing these companies also seems to increase with the age of the company and the number of family members active in the company.”  
  • The same survey by IMD suggested that family businesses unable to plan for family succession are likeliest to prefer using non-family members as managers while retaining ownership to going public (by 57% to 33%).  
  • A survey of 1,000 American family businesses conducted this year found more than 40% saying that they are placing a high priority on succession planning. The survey was conducted by MassMutual, and showed the percentage of family businesses doing succession planning had increased substantially over each of the last three years.  
  • A 1993 study of French family businesses showed that only one-third of owner-managers between ages 50 and 60 had decided on a succession strategy.

The Estate Tax Reform Effort

Both the U.S. House of Representatives and the Senate are considering major liberalizations in the estate tax rules.

The House is focusing most heavily on legislation that would exempt up to $1.5 million of family-business assets from federal estate taxes. If the firm is valued at more than $1.5 million, the tax rate is cut in half, from 55% to 27.5%. Heirs must repay the entire estate tax benefit if they do not continue running the firm for ten years.

Similar legislation in the Senate, introduced by Senate Majority Leader Bob Dole and others would provide the same $1.5 million threshold, indexed for inflation, and without the repayment requirement.

The Congressional effort to cut estate taxes has the heavy support of the influential National Federation of Independent Business, with 600,000 small business members.

Just How Open Is Open in a Family Business?

Even the closest of families in business together can have difficulty sharing certain information. In the September issue of Nation’s Business, John Ward and Craig Aronoff identify five areas that can be especially thorny when it comes to complete disclosure:

  1. Compensation and perks of family members.The speculation and rumors that often occur in the absence of disclosure can be worse than the hurt feelings of openness. Also, disclosure about such matters as expense accounts and other perks can lead to constructive explanations and rational policy-making concerning such decisions.  
  2. Wills and estate plans.Family members are usually reluctant to share these plans for fear of insulting individuals or misleading family members if plans change. Failure to share these plans can lead to business-threatening shocks and upset after the fact.  
  3. Family support and gifting.Especially if gifts and personal support are unequal, openness provides an opportunity to get everything out in the open before irreversible distrust is created.  
  4. Shareholder liquidity.Openness in coming to terms about limited stock redemptions helps family members plan by allowing them to share their long-term intentions for redemptions.  
  5. Choice of trustees and business successors. Members of the elder generation may hold off on sharing information here to avoid hurting the feelings of those passed over. Yet disclosure helps all family members develop reasonable expectations and contingency plans.

One cautionary note: Don’t rush into full and open disclosure, no matter how good your intentions. Authors recommend “that the sharing of information unwind gradually, in family meetings, with professional advisers and/or a family-meeting facilitator present.”