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Business Owner Blues

Are you a business owner? If so, then you probably know what it’s like to be the first one to arrive in the morning and the last one to leave in the evening. Have your employees ever taken home paychecks while you sacrificed your paycheck to the bottomless pit called accounts payable? Have you ever paid your mortgage on a credit card? Over the years, you have no doubt worked through physical, mental and financial pain that would have caused other folks to close shop and look for a job elsewhere. No doubt, as a business owner you have survived untold challenges. If yours is a family business, then you may face some unique challenges to protect and preserve your business…and your family.

Some Numbers
     It would be an understatement to say that family businesses are the backbone of the American economy. Some 90 percent of all businesses in this country are either family-owned or family-controlled. They come in all shapes, sizes and colors, representing all sectors of our economy. From agriculture, to services, to technology, to manufacturing, family businesses generate an estimated one-half of the U.S. Gross National Product and pay half of all wages earned in this country. Not all family businesses are traditional small businesses either. In fact, about one-third of all businesses included in the Fortune 500 are family businesses. But not all of the family business statistics are rosy.

Tragic Transitions
     Family businesses do not tend to outlive their founders. At any given moment, 40 percent of family businesses are in the process of transferring their ownership. Unfortunately, two-thirds of all initial transfers fail. Of the one-third that survives an initial transfer, only one-half will survive a second transfer. Why such a dismal success rate? The reasons are as varied and unique as the businesses and business owners themselves. Nevertheless, many of the failed transfers can be traced to three causes: people, taxes and cash.  

People Planning
     The family element in every family business can mean the difference between its success or failure during the transfer process. Common triggering events include the retirement, disability or death of the business owner. Tough questions must be asked and answered. Otherwise, a business that took you decades to build can be destroyed overnight. For example, who will run the business after you? Will it be your spouse, one of your children or a non-family member key employee? If not your spouse, will your spouse be financially dependent on the business or financially independent of the business? What arrangements have you made for the inheritance of your business-inactive children? Have you in-law proofed your estate? Thinking ahead to the second-generation transfer of your business, what provisions have you made to encourage thrift and industry among your grandchildren?

Tax Truths
     The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) went into effect on January 1, 2002. This new law provides welcome relief from federal estate taxes by increasing the estate tax exemption and reducing the top estate tax rate until full repeal of the federal estate tax in 2010. Unfortunately, Title V of EGTRRA declares its own death effective January 1, 2011. At that time the federal estate tax returns to its pre-EGTRRA form. The only thing certain about this future tax uncertainty is the need for proper federal estate tax planning. Why? Without proper planning, your family may have to sell your family business just to meet the IRS cash call. 

Money Matters
     Will there be enough money to fuel the survival of your family business? Unless you coordinate your financial plan with your Life & Estate Plan, there may not be enough cash to fund your ultimate objectives. For instance, an appropriately funded plan could provide financial security for your spouse, ensure that your preferred successor takes over the business, equalize the eventual inheritance among your children and protect their inheritance from future problems (e.g. divorces, lawsuits and bankruptcies). Life insurance is typically used to fund such money matters when owned in the proper amount, type and manner. 

Conclusion
      This has been a brief introduction to a complex topic. Always seek qualified legal counsel when planning for the survival of your family business.

Copyright © 2005 Integrity Marketing Solutions. All rights reserved. Some artwork provided under license agreement. This publication does not constitute legal, accounting or other professional advice. Although it is intended to be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on this material.