Survey: many businesses unprepared for succession

Are you ready to transition your business to the next generation of management? What does it mean to you and your family?

Some basic facts about business succession have held true over the past 25 years:

• 70 percent of family-owned businesses do not survive to the second generation.

• Only 12 percent survive to the third generation.

• 81 percent of family-owned businesses want the business to stay in the family.

But a survey conducted by Massachusetts Mutual Financial Group and the Raymond Institute has revealed a number of interesting statistics regarding business planning in the near future. The survey looked at family-owned companies that were at least 10 years old and had sales volume in excess of $10,000 in order to shed light on the question of business succession planning.

Respondents were asked about the plans the founders had made to transfer the company to the next generation; who the founder thought would lead the company in the future; how the current senior management was related to the founder; and what obstacles the founder thought would stand in the way of the future success of the company.

The survey results predict an unprecedented power shift in business ownership in the near future. Within the next five years, 39 percent of family-owned businesses will change leadership through the retirement or semi-retirement of the CEO.

Of the CEOs who expect to retire within five years (42 percent of respondents), the study found that more than 40 percent have not chosen a successor. Of CEOs who are 61 or older and expect to retire within five years, 55 percent have not chosen a successor.

A lack of estate planning and succession planning is putting many family-owned businesses at risk. While 67.5 percent report a “good” understanding of estate planning, nearly 19 percent have not completed an estate plan.

What is further troubling is that 37 percent of significant shareholders report they have no knowledge of the senior shareholder’s intentions for transferring shares through their estate plan.

Life insurance plays a big role in funding stock purchase and estate tax liabilities. More than 47 percent of the respondents have used life insurance as their primary source to fund these costs.

However, with more than 55 percent of business owners reporting they do not conduct regular formal valuations of their businesses, it becomes very difficult to accurately calculate their future liabilities.

The following are just a few of the problems that the survey results pinpoint:

• With such a large shift in top management, many companies could be setting the stage for stressful transitions that may divert precious resources needed to run the business.

• Lack of understanding of a senior shareholder’s planning could impede a business’s capital-needs plans for estate taxes and stock redemptions, as well as generate friction among family members.

• Lack of accurate, up-to-date business valuations could lead to under-funding estate tax liabilities.

• Current life insurance policies may not be sufficient to cover the cost of estate taxes.

Many family-owned business leaders report they have a positive outlook for the future of their businesses. However, as this senior generation prepares to retire, keeping the business in the family for successive generations while preparing for growth is presenting many complex challenges.

This article was written by Richard Gibbs, of Gibbs Wealth Management Group. Mr. Gibbs and Dennis Blender, of Blender Consulting Group, presented a seminar on business succession at the MRA Retail Education Conference in March.