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by Andrew N.
Karlen, Esq.
"Fire, flood, explosions, even widespread theft,
can certainly spell disaster for a small company. There is, however, another
catastrophe waiting to happen in the form of financial ruin -- the failure
to pass the torch of ownership to a new generation of owners and managers."
According to the United States Small Business Administration,
nine out of ten businesses in the country are either closely held or family
run, but the odds of surviving the transition from the founding generation
to the next are slim: only three of ten actually make it. Ownership succession
to the third generation is even more unlikely: less than two of ten survive.
To avoid becoming a casualty of these
succession statistics, senior management must come to grips with passing
on the assets and management control from one generation to the next.
How a firm succeeds at succession planning may be the ultimate measure
of a company's health and management well-being.
Ownership succession generally falls
into one or all of several categories. Most would agree that a best-case
succession would be to a family member or members. However, if the conditions
are not right for this to take place, succession to the employees of the
firm is often another desirable alternative. A third choice could be the
sale of the company to outside investors or even competitors. Clearly,
the last and worst case would be the forced sale to meet debt or estate
tax obligations.
While experts in the field of business
continuity planning point to a number of obstacles in the process -- loss
of ego, monetary insecurities, uncertainty about the next generation's
qualifications most agree that owners in their early 60s should begin
addressing matters of management and ownership succession.
However, planning for the transition
of management and the transfer of ownership begins with the senior generation
grasping the need and becoming secure with the concept. The goal is not
for an owner to simply walk into work one day and turn over the reins
-- the goal is for the owner to understand that the process is necessary
for his or her own lifestyle and retirement needs. This is the only way
to ensure that the business, which may have taken a lifetime to build,
will survive and flourish for the next generation of family or key employees
to enjoy.
Not addressing the future can be a
major problem for the founding generation. The earlier the better because
it gives owners the most time to select and train their successor(s).
Rethinking what business succession
planning really is begins with throwing out the notions that it is a sort
of stepchild of estate planning or a mechanism to put the current owner
of a business out to pasture. Or, it is believed to be merely the end
result of a boilerplate buy-sell agreement. Succession or continuity planning
prepares the business and the family for the heavy bite that federal taxes
take when a business is passed from one generation to the next.
"Companies should realize that
in small, closely-held businesses, a lot of times the value of your estate
is bricks and mortar and not liquid assets," said Gerald Mirra of
Corporate Plans Associates (Armonk, NY). "In the event of death,
when the government comes to collect the estate tax, they want cash, not
physical property. Companies that don't plan carefully can be forced to
liquidate to pay estate taxes."
"Let me put it another way,"
Mr. Mirra added. "If I own the World Trade Center, I can leave it
to my spouse with no federal estate tax. But when mom dies the government
would take one of those Twin Towers away. The estate tax for large estates
is essentially 50 percent of what you own. If that isn't a sobering fact
for taking action, I don't know what is."
Failure to plan for the passing of
the torch can certainly lead to financial ruin. We all know the story
of the Miami Dolphin's Joe Robbie and the fire sale of the team and stadium
his heirs were forced into in order to meet federal estate taxes obligations.
Indeed, the prospects of a 50 percent tax should be more than sobering,
it should be an alarm. Thankfully it is one that sounds before disaster
strikes.
Andrew N. Karlen, Esq., with law offices
in White Plains, NY represents businesses in areas of business formation,
transactions, planning, real estate and litigation. He is vice chair for
Small Business of the Westchester County Chamber of Commerce and Co-Chair
of the Corporate and Commercial Law Committee of the Westchester County
Bar Association.
Copyright (c)2003, Andrew N. Karlen Esq.
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