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www.galbraithlaw.com
INDIANAPOLIS
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317.578.1400
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Naples, FL 34110
239.593.0996
239.593.4623 fax
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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.
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.
Copyright © 2004 by Integrity Marketing
Solutions. All rights reserved.
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