Family Business transition – a significant transfer of wealth
Baby Boomers wave – a change in ownership and transfer in value
There is a sea change in the family business marketplace. About 40% of family businesses in 2 respected US based surveys expect the leadership of their companies to change hands within the next five years. Well over half (56% in the MassMutual study, 71% in the CFIB) expect a leadership change within 10 years. More than four out of five businesses are still controlled by their founders (MassMutual). About a third of the companies surveyed have a chief executive who’s older than 60, and the average age is 54. Only about 11% are younger than 41, and only about 11% are older than 71 (MassMutual). About 88% of the survey respondents believe the same family or families will control the business in five years. But succession statistics undermine this belief: about 30% of family owned businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family business operates into the fourth generation or beyond.
Family Business Estate Planning
The state of estate planning among family business owners is probably better than ever before. Having said that, other than preparing a will, almost 20% have no estate planning! Almost two-thirds of significant shareholders in the family company know of the senior generation’s share transfer intentions, but that’s a surprising drop in the figure of 76% from a survey six years prior. Even worse, over one in three respondents have no knowledge of the senior generation’s transfer plans. Senior generation family business members struggle mightily with how to fairly divide up their life’s work product. For example, a 2006 PriceWaterhouseCoopers survey found that 53% of the chief executives of the fastest growing U.S. private companies don’t address the disposition of their business in their estate plans at all. In addition, only 22% of owners surveyed have revised the plan in the past five years.
The surveys tell us that, for company owners who are considering their exits, the most common method is to attempt to sell to non-family members (CFIB). 26% intend to transfer their business to family members, and 26% of the others have created no plans at all. Since the surveys indicated that approximately 40% of family companies will transition within the next five years, to have no plan at all for how that’s going to happen is a significant cause for concern.