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Business Succession Plans For Family-Owned Businesses

Small business owner smiling in his shop.

If you have recently gone into a superstore, pharmacy, car dealership, or Facebook you have given support to one of the largest segments of the marketplace – the family-owned business. Although most consumers tend to envision small Mom & Pop organizations, family enterprises make up many of the major players in the current market. Names like Wal-Mart, Facebook, Anheuser-Busch, Volkswagen, and Novartis have their origins in families and still operate as family-owned organizations today. Some statistics related to family-run businesses reveal how prevalent they are within our economy.

  • 80-90% of North American businesses are family firms. (2003)

  • There are 5.5 million family businesses in the US.

  • Family organizations make up 57% of the GDP,

  • Family Businesses currently employ 62% of the nation’s workforce.

  • Family enterprises generate 75% of all new jobs.

  • 60% of all publicly held US companies are family controlled.

  • 95% of family businesses are actively engaged in philanthropy.

The numbers and statistics tell the story of how vital family business is in our economy, not only in the United States, but also on a global scale. International businesses contribute 64% of the GDP. Both young and old family firms experience better performance than non-family organizations. These businesses have also been instrumental in expanding opportunity for women in the workforce, with 24% of family businesses being led by a female president or CEO/CFO (MassMutual American Family Business Survey, 2007).

Succession rates are also high, as 85% of family businesses will be handed down to other family members. For these reasons, family-based enterprise in an integral aspect of economic growth and stability. While opportunities for success abound, business owners should also consider the risks associated with various events that may have a harmful impact on a family business and its ability to continue operations.

Business Succession Plans for Family Owned Business

An examination of the longevity of a family business reveals the risks associated over multiple generations of company leadership. Thirty percent of these enterprises survive to the second generation, but by the third and fourth generations sustainability diminishes sharply at just 12% and 3% respectively (Joseph Astrachan, Ph. D. Editor, Family Business Review). Even more of a concern is the lack of preparation related to moving the business forward. Less than half of family organizational leaders have identified a successor and few actions beyond a will are ever considered for a transition of ownership.

The concept of a Business Succession Plan is to address the questions and concerns for the future, and many include various aspects of organizational success. Diversification, digital enhancement, stewardship and social governance, and family continuity are top priority for organizations that are intentional in remaining both profitable and relevant for years to come.

Some ways to address these concerns involve specialized training for employees and leadership to instill performance success; transparency and relationship building within the local community to promote trust and credibility; and finding avenues to encourage young family members to work in the business for first-hand knowledge of the organization’s operations from the ground up to ensure consistency in quality. Finding creative staff, appointing a responsible Board of Directors, driving innovative processes, and maintaining credible leaders will help to solidify a company’s longevity in the marketplace and the community (

Another vital part of family business transitions involves the financial risks of succession. The transfer of ownership may include contracts and financial arrangements for new ownership. This is often more difficult if there are no formal plans in place and especially in the event of a business owner’s unexpected death. One way to mitigate this risk is to visit with your local insurance agent to determine how to address financial vulnerabilities with various types of life insurance protection.

Buy-Sell Agreement

These legal contracts set up parameters, or triggers, for a transfer of ownership within an organization. A company accountant should be able to provide input on the best type of agreement for your company. One option to consider is a life insurance policy that can fund the buyout among owners at the time of death. In a Buy-Sell policy, the policy may be established where the organization is the policy owner and pays the premiums. In the event of the covered individual’s death, the life insurance benefits are assigned to the company to cover the cost of buying out that person’s interest in the business. This is usually paid out to the spouse or children who may have no interest in maintaining ownership in the organization.

Cross-Purchase Agreement

Another type of life insurance plan to consider may involve multiple business leaders purchasing coverage on the other owners. This will work in the same way a Buy-Sell Agreement works except each owner must have a plan that is reciprocated by the other owners. The owner of policy pays the premiums, then collects the death benefit at the time of an owner’s death to buyout the interest in the organization. One factor to consider is that a separate policy should be purchased for each person, so this can become cumbersome depending on the number of controlling parties in the company. For this reason, most companies prefer to use the entity’s name as the owner and beneficiary of the policy proceeds.

Key Person Policy

In many family-owned enterprises, the success of the company may depend on a core group of leaders. Perhaps an owner, manager, or employee are vital to the organization’s success and continued operation and would create financial hardship in the event of an unexpected death. Key-Person coverage is a life insurance policy that will protect the business as the company is listed as the owner and receives the death benefit to fray the costs of replacing that individual or needing to hire additional staff in maintaining company performance. Considering this coverage may also help leaders to identify those individuals who bring added value to the organization.

These policies offer practical ways to address just some of the concerns with Business Succession, especially for family-owned businesses currently in operation. Take some time today to go over your company’s future with your accountant, attorney, and your insurance agent. We are available to assist you with your business succession insurance needs. Give us a call today.



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