Keeping it all in the family.

How small businesses can survive their founders

There was a time when it was a cinch for the family patriarch to choose who would inherit the family fortune and take control of the family business. In most cases, the eldest son was the heir apparent.

Regardless of his business savvy or lack there of, the reins to the dynasty were his upon the death of Daddy, with few or no questions asked. Today, such a notion would be anachronistic, say some succession-planning experts.

James Olan Hutcheson, founder and president of ReGeneration Partners, an international family business consulting firm in Dallas, says the future of a family-owned business is handled with more forethought and under a much wider scope of inheritance laws. Now, with greater options to live healthier and longer lives, entrepreneurs and senior family business leaders must determine the best way and time to pass the business on with the least amount of risk to self, business, and family.

"Two-thirds of family businesses fail before the second generation takes over," says Hutcheson. "This usually occurs because of a lack of succession planning or interest on the part of the spouse or siblings."

Hutcheson, who is the grandson of Olan Mills, founder of Olan Mills Inc., a large international chain of photography and portrait studios, knows first-hand the pitfalls a family business must contend with after the founder dies. After witnessing the inevitable squabbles and conflicts between family members regarding the future of Olan Mills Inc., the company hired a family business consultant to settle the disputes.

The intervention of the consultant solved some of the problems and gave Hutcheson the idea to start his own family-consulting business in 1995.

"Often, children are named as the beneficiaries but they're not interested in running the mom-and-pop business their parents started," Hutcheson said. "They are interested more in corporate enterprise."

Steven Lehr, a West Caldwell, New Jersey, attorney who specializes in family business and estate planning recommends that entrepreneurs establish a succession plan as quickly as possible. The merits of this action include an orderly and legally painless transfer of ownership upon the death of the founder of the company. Secondly, a big tax liability to Uncle Sam can be avoided.

"I frequently advise clients that if they don't have a succession plan in place," he says, "Uncle Sam has one already in place for you." Lehr, who occasionally conducts tax seminars and business succession planning seminars throughout the New York metropolitan area, encourages clients, especially entrepreneurs who may have created a succession plan years ago, to reevaluate and update the bequest.

"A plan that was appropriate 20 years ago may not be as suitable today," Lehr says. "Tax and inheritance laws have changed significantly in the past few years."