Ninety percent of the 21 million US businesses are family owned. Yet only thirty percent of family run companies today succeed into the second generation, and only 15 percent survive into the third (Source SBA.gov). The reason for this significant failure is obvious; these businesses lack an orderly succession plan.
Family run businesses have struggled through the recent recession. For many, sales and cash flows have declined. The inability of many small businesses to get adequate bank financing has exacerbated the problem. However, some families businesses are taking advantage of this recession by executing their succession plan.
There are several reasons that the recession is a prime time to execute your succession plan. They are as follows:
Business valuations are low – A business generating less income is worth less money. The reduction in value makes it much more tax efficient to move these assets out of one’s estate and into the hands of the next generation. Just a few years ago the same transfer may have cost the business owner a significant amount of taxes.
Commercial real estate valuations are low - If your business also owns real estate, these assets also have likely declined in value. If this is the case, this may be a good time to transfer these assets to your heirs.
Tax rates are low – The maximum capital gains rate is 15% in 2010. This rate is increasing to 20% in 2011. With the federal government operating a $1.6 trillion deficit, do not expect rates to be this low anytime in the next generation. You may consider taking advantage of this now.
There are many strategies and techniques used to execute a succession plan. If you are in need of developing a succession plan for your family business, please see the following “Business Succession – A Ten Step Checklist”.
Business owners are obviously distracted by economic issues, but please do not miss out on this opportunity to align you business for the future and to reduce your taxable estate. If you have any questions, please submit them on the bottom right side of this webpage.
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