Why You Should Start Preparing Your Ultimate Exit Strategy Now

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3 min read

This story appears in the September 2013 issue of . Subscribe »

When my father died from a long bout with cancer 10 days before his 50th birthday, he left behind a decade-old family business. "This company is my legacy," he told me a week before his death. "If you boys are careful, it'll support the family for years to come. It'll be like the goose that laid golden eggs."

Because my father planned ahead--in his will, he left 10 percent of the company to each of his three sons and one cousin, and 60 percent to his wife--the process of passing the business from one generation to the next went smoothly. Well, sort of.

My father did ruffle our feathers so that his business could survive.

35% Estate Tax Rate
This rate applies to the total value of your personal assets and your business if it exceeds $5.1 million. Without proper planning, your survivors may need to liquidate your company just to pay this tax.

There were hurt feelings when we boys learned that none of us was chosen to take charge, and that we had to manage the business as a team. Ultimately, though, Dad was right. Because he planned carefully, the golden eggs continue 18 years after his death. And because my brothers and I have had to share responsibilities, we've been free to develop other aspects of our careers--in my case, becoming a writer.

Things aren't always so easy, though. In fact, the Family Business Institute says that only 30 percent of family businesses survive into the second generation. The primary culprit? Ineffective succession planning by the business owner.

Look, nobody expects to die, but just as you would draft a will to pass on your personal possessions, you need to create a succession plan to ensure your company survives unscathed. A plan gives you control over your company's destiny. You don't want your family to fight after you're gone, and you don't want the IRS to claim more than is necessary during the transition.

Naturally, every succession plan is different, but there are a few basic rules of thumb.

Start early. Planning now affords you more options, especially when it comes to mitigating tax liability. The earlier you start transferring ownership to your children, the smaller the estate tax bill will be after you die. Early action also allows you time to correct your course (if, for example, your daughter realizes she has no interest in the business, or the IRS changes a tax policy).

Be objective. Face it: What's best for your family is not always what's best for your business. Determine what your business requires to survive and grow, and be prepared to admit, possibly painfully, that your spouse or children may not be up to the task.

Seek help. Consult your accountant and attorney about reducing your family's tax obligations and avoiding possible legal complications between partners and family.

Consider the staff. Your plan should address the vested interests of company officers and loyal employees; overlooking their contributions and value to the business could backfire. Don't risk the bad karma--or the possibility that they could leave and take your best customers with them.

Communicate clearly. In the months before he died, my father pulled me aside several times to explain his choices. He knew that I didn't agree with everything he was doing. However, by being open and direct, he helped me understand his reasoning.

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