According to statistics published in the Harvard Business Review, less than 1/3 of family businesses survive from the first to the second generation. The figures get worse from there: only about 10% of those businesses survive from the first to the third generation.
The obvious take away from those statistics is that most businesses simply don’t have an effective business succession plan in place to transition the operations successfully beyond the original entrepreneur’s generation. What does a lack of a succession plan or a failed succession plan mean for the entrepreneur and his family? It could mean a number of things:
- Perhaps business assets are unnecessarily overexposed to estate tax and/or income tax;
- Maybe the business assets are sold at a “fire sale” for pennies on the dollar;
- Sometimes customers are lost while uncertainty runs rampant during a delayed transition;
- Employees (even family employees) who depend on the business for their livelihood may well be displaced; and/or
- Commercial loan covenants may come into default causing an unexpected or expensive refinance or even foreclosure.
Certainly, the above isn’t an exhaustive list of potential problems. The real problem is a failure to plan.
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