Academic journal article Journal of Accountancy

Family Business Succession Planning

Academic journal article Journal of Accountancy

Family Business Succession Planning

Article excerpt

A 10-step process can make it easier.

A primary goal in financial planning is to help clients decide how, when and to whom to transfer their wealth. In planning for closely held business owners, two issues should be addressed:

* The disruptive effects of a change in management and ownership on the operation and the value of the family business.

* The liquidity necessary to pay estate taxes.

Family businesses are of particular concern because nearly 90% of U.S. businesses are family-controlled. Additionally, family businesses produce over half the gross national product.

In the course of estate and retirement planning for family business owners, CPAs must address both personal and technical issues in formulating a plan to achieve the owner's goals. This article provides a 10-step process CPAs can use to help solve closely held business owners' succession problems.


Succession planning is a dynamic process requiring the current ownership and management to plan the company's future and then to enact the resulting plan. It typically begins immediately before the owner's retirement. However, most practitioners encourage clients to address succession issues immediately rather than wait until retirement. As is the case in other estate planning engagements, there is no due date for succession planning because the owner may die or become incapacitated at any time.

A client usually can be sold on succession planning's value by imagining the potentially traumatic outcome if little or no planning occurs. According to the Wharton Center for Applied Research, only one-third of family companies passing from the first to the second generation remain viable, while only 15% continue to the third generation.

Marketing pointer. Patience and persistence are necessary to motivate clients to act. If a client resists, consider switching tactics and sell the engagement as the creation of an emergency plan. A family business owner may be more willing to address emotionally charged issues if he or she views the solutions as temporary rather than permanent.

Frequently, the focus is on taxes because the family business represents the largest concentration of wealth in the estate. When planning for large estates, both families and planners frequently ignore personal issues. CPAs must prevent clients from making the critical error of maximizing tax savings but destroying the business with a poor succession plan. In succession planning engagements, communication skills and an understanding of family and business relationships are as important as the estate tax issues.

Working with family businesses affords unique opportunities and challenges. Among the most significant are:

* Family members may show more commitment to the business because of potential ownership benefits.

* Family members may be committed out of a desire to be appreciated and loved by other family members.

* Family businesses may have difficulty attracting and retaining desirable employees. Qualified individuals may avoid family-owned businesses because of a perception nepotism limits advancement opportunities.

* Family relationships often play a greater role than skills or education in determining the makeup of management.

* Family businesses are partly rational and partly emotional.


Step 1 - Gather and analyze financial and legal data. The first step in data gathering is to understand the business. Review the company's history, get acquainted with current operations and become familiar with the industry. Then review financial statements, income tax returns, business plans and all pertinent legal documents.

Besides reviewing financial and legal information, CPAs need to understand the business's customer base. Consider the impact of a principal's death on it. Identify key clients and explore ways to avoid losing an important client or block of clients. …

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