Insurance needs for the family-owned business.

IN THE AUGUST ISSUE of William Penn Life, I discussed the special needs of two of the fastest growing markets in America today: Generation X and Millennials (aka, Generation Y). Because many Gen X and Y families will stand to inherit or form family-owned businesses, I’d like to discuss the needs of business owners, especially those in family-run businesses.

First, let’s review some background data. Family-run businesses are economic powerhouses and form the backbone of the American economy. Family businesses account for 80 to 90 percent of all businesses in the U.S., and 35 percent of Fortune 500 companies are family-controlled businesses. The greatest part of America’s wealth lies within family-owned businesses. And, since family-run businesses employ nearly 62 percent of the entire U.S. workforce, chances are high that today’s Millennial or GenX’er will at some point be employed by — or become part of — a family-owned business enterprise.

According to a recent study conducted by the Harvard Business Review, some 70 percent of family-owned businesses fail or are sold before the second generation gets the chance to take over. Only 10 percent remain active into the third generation, and only 3 percent survive for the third and subsequent generations.

The family businesses that survive past the first generation have longevity. Studies have shown that family control helps a business operate more efficiently since family members are able to positively affect the company values, have fewer human resource problems and help drive new entrepreneurial spirit. What drives many family-run businesses is the sense of ownership and connection between the owners, other family members and employees. For this reason, family-run businesses have less turnover than their publicly-held counterparts, and today’s business owners are concerned about transferring not only the business wealth but also their values surrounding their wealth to future generations.

Successful family businesses do business the right way. They focus on the next generation — not the next quarter or year. They tend to generate good company morals and values by putting customers and employees first and emphasize a higher level of social responsibility than larger publicly-held firms.

Women are becoming increasingly involved in family-run businesses. Currently 24 percent of family businesses are led or owned by a female, and 31 percent of the firms surveyed by the Harvard Business Review indicated that the next successor (the person identified to take over the business) is a female. The study also indicates that over the last five years, woman-owned family businesses have increased by 37 percent.

Now, let’s review some issues that today’s family-owned business might incur:

According to the Harvard study, the mean age of today’s business owner is 60.5 years. As Americans live longer, business estate and succession planning will become increasingly important if the family-owned business is expected to survive to the next generation, especially if the parent started the business and intends to pass it on to one or more children.

By 2017, it is estimated that over 40 percent of all family business owners in the U.S. expect to retire, creating a huge transition of ownership. Less than half of those indicating their plan to retire have selected a successor. Nearly one-third of U.S. business owners surveyed say they have no estate plan beyond a simple will, and only 53 percent said they have a “pretty good” understanding of how to handle the transition. While 70 percent of the respondents indicated their desire to pass the business to the next generation, only 30 percent will be successful transitioning to the next generation.

Business owners should take time — at least once each year — to review the value of their business and think about what would happen if they were no longer there to run the business. Who would take over? What’s your “exit strategy”?

Many business owners say they are just too busy to take the time to sit down with an advisor and review their business needs. Often, the self-employed or family-owned business owner neglects to see the need for life insurance, assuming that the business will take care of itself should the owner or key employee suffer an untimely death.

Earlier in my career, I was referred to a business owner who “didn’t believe” in life insurance or see how it could benefit him and his family. He theorized that his family could liquidate his business assets (mostly machinery and real estate) when he died and couldn’t see the need to carry life insurance. Although neither of his children were very involved in the family business, he assumed (incorrectly) that one of them would step in and take over the business at some point.

When he passed away unexpectedly, his family had to sell his assets quickly for just pennies on the dollar in order to generate the cash they so desperately needed for final expenses and income. Without a succession plan in place, his business was left with receivables that couldn’t be collected, bills that needed to be paid and nobody with the expertise to continue the business as an ongoing concern.

He could have insured the full value of his business for pennies on the dollar and been able to pass the full value of his business to his heirs.  He also erred in his assumption that his children would take over the business, when neither of them had shown an interest or been involved in the day-to-day operations.

Business owners need insurance for income replacement and to protect the future of their company. Without insurance, if a partner, owner or key employee suddenly dies, the business may ultimately fail. No matter the type of business you own or your business form (LLC, sole proprietorship, partnership, etc.), you should have a succession plan for your business and an exit strategy. If your intention is to pass the business to your Gen X or Millennial children, it’s important to get them involved as early as possible in the inner workings of the family business so as not to wind up like our example above.

Do you or a loved one own a family business? Have you taken the time to meet with financial advisors (attorney, accountant, insurance agent) to review your business needs and discuss your succession plan and exit strategy?

Why not put the expertise of your WPA agent or broker to work for you? We can work with you and your other advisors to help plan a strategy that makes sense for you and your business. With proper planning, you can be sure that your business will be among the 30 percent that survives beyond the first generation and leave a legacy for generations to come.

Why not call your WPA agent or broker today? Don’t have an agent? Call our Home Office, and we’ll be happy to connect you with one in your area.