Considerations for Family or Closely-held Business Clients

Accordingly, family business succession planning may become an increasing part of an estate planning attorney’s practice, or at a minimum an important topic of discussion.  There are some startling statistics with regard to family businesses as it relates to their viability and succession.
Often-cited statistics reflect that approximately one-third of family businesses survive to the 2nd generation, and only approximately 10% make it to the 3rd generation. The cited causes for this failure rate is lack of succession planning, poor communication between generations, and inadequate preparation of the next generation.

With regard to the lack of planning, statistics suggest that only one-third of family businesses have an estate plan.  Similarly, one-third of family business have a strategic plan.  Some of these statistics are corroborated by the American Family Business Survey (conducted by MassMutual Financial Group, Kennesaw State University and Family Firm Interest) (“Survey”).  In the Survey, less than one-third of the business owners participating in the survey (31.4%) had no estate plan beyond a will.  This does not speak well of the potential  devastating effects estate taxes may have on the prospects of the family business and its viability.  However, the recent increase of the Estate Tax Exemption to $5,000,000, as adjusted for inflation ($5,250,000 for 2013) may ameliorate this issue for some family businesses. Beyond the estate planning issues, a significant number of the business owners who actually planned to retire within 10 years had not selected a potential successor for the business,  again jeopardizing the stability  and future success of the business.  Another interesting statistic was the fact that almost a third (30.5%) of the business owners had no plan to retire, ever; and nearly another third (29.2%) reported that retirement is more than 11 years away.  With the median age of the current business owners being 51 at the time, this means that many owners plan to die in office, which would not be beneficial to the family, the firm, its employees and its clients.  The Survey also inquired as to the most trusted advisor of the family business owners.  The 2007 Survey indicated that the business owner’s spouse was seen as the most trusted advisor, followed by accountant, business peer, parent, lawyer, and financial services advisor.  Compared to the American Family Business Survey conducted in 2002, the attorney fell from a rank of 2nd as the most trusted advisor to 5th in 2007.  Therefore, the status of the attorney as a most trusted advisor has fallen over that 5 year period.  Consider how this perception impacts the role of the attorney as it relates to advising business clients, especially in the area of succession planning.  I believe that an attorney is the best suited advisor to counsel clients with all aspects of estate and succession planning.

In counseling and advising family business clients, consider reviewing the following issues with your family or closely-held business clients:

  • The business owner’s personal goals and vision for the transfer of ownership and management;
  • Is a successor identified and ready?
  • The importance of family involvement in leadership and ownership of the business?
  • Has the family business owner communicated his or her vision, values, expectations and long-term plans related to the family, business and ownership?
  • The business owner’s liquidity needs and source of retirement cash flow needs, especially as it may relate to reliance on the business;
  • The value of the business, especially any recent valuations conducted;
  • Is there a current agreement among the owners of the business, such as a stockholder’s agreement, buy-sell agreement, operating agreement that is consistent with the succession plan?
  • The business owner’s preferences as to the transfer of ownership of the business, such as timing and nature of transfer (gift, sale or a combination).

This list is not intended to be exhaustive as to the appropriate topics and discussions that should be considered for a business owner.  However, consideration of many of these issues represents a good starting point toward the development of a business succession plan.  Above all else, given the failure of business owners to plan for the succession of their business, and develop appropriate estate and succession plans, it is never too early to begin such discussions, and be persistent.

By: Mark E. Kellogg, J.D., CPA

For more information, please contact Fraser Trebilcock attorney Mark E. Kellogg at or 517.482.5800..


 As published in Ingham County Legal News on August 1, 2013