Inadequate Estate/Financial Planning Blamed for Family Business Failures

Only in a relatively few instances did the business failure follow an orderly transition between father and son.

While most founders had an estate plan, in the opinion of the heirs, most were severely flawed.

Editor’s Note: The following data, reprinted by permission from Richard Dino, Ph.D., Director of the University of Connecticut Family Business Program, and based on a study by Karen File, an Associate Professor at the University and Russ Prince of Prince & Associates, clearly points up the need for proper estate planning and periodic reviews to protect the firm and family.

Inadequate estate planning and failure to properly prepare and provide for the transition to the next generation, coupled with lack of funds to pay the estate taxes, were among the three leading causes for the failure of nearly 800 family-owned businesses in recent years. Conflicts with family members, not actively involved in the business, was a close fourth.

The findings are the result of a national survey of the heirs of the failed businesses, conducted by Karen File, an Associate Professor at the University of Connecticut’s Business School and Russ Prince of Prince and Associates, for their book on family businesses.

According to the survey:

• 1. Before the crisis that precipitated the failures, all of the firms had experienced significant revenue growth — 91.3% had reported annual revenue growth in excess of 5%. All were successful employers and valued participants in their local economies: 46.1% had over 100 employees;  46.7% between 51 and 100, and only 7.1%, 50 to less.2. The failures caused sizable unemployment. More than 75% of the employees of 41.3% of the companies surveyed lost their jobs as a result of the failures. The average number of jobs lost per company was listed as 128.

  3. In nearly half (47.7 %) of the cases, the transition and ultimate collapse of the business was precipitated by the founder’s death, or in 29.8% of the cases, the owner’s unexpected death. Only in a relatively few instances (16.4 %) did the business failure follow an orderly transition between founder and son, and in situations where the owner was forced to retire, the figure drops to 6.1%.

  4. Most heirs, regardless of the industry, believed the business failures were the result of inadequate estate/financial planning, poor preparation for the transfer, and a lack of assets to cover the estate taxes, followed by conflicts with non-active family members, and insufficient capital with which to effectively run the business.

  5. While most founders (76%) had an estate plan, in the opinion of the heirs, most were severely flawed and did not provide sufficient resources for the transition of the business or to meet estate tax obligations.

  6. Conflicts between family members in and out of the business and with non-family employees were also associated with the business failure. Conflicts, before, during and after the transition crisis that precipitated the failures were also viewed by the heirs as the result of inadequate financial footing.

  7. Family business failures were not often the result of management, market or macro-environmental forces. Most heirs thought they had adequate exposure to key customers, that competition was manageable, that there was adequate marketing planning, that the business focused on customer needs, and the market for their product was on-going. Nor, did they view the changes in the regulatory or technological environment as reasons for the failures.

The survey results, File and Prince point out, represent the perspective of the failed business’ principal heir. As in any complex social process, they note that there are likely to be various other perspectives. The survey, however, while it captures just one, should advance the discussion dealing with family business failures, according to its authors, File and Prince.