There is a great word in the dictionary called “pluck,” or a “resourceful courage and daring in the face of difficulties; spirit.” This industry has lots of owners with pluck.

I'm amazed by the stories I've heard. There was Victor, the talented young ready-mixed concrete executive who quit his job, sold his house to take the $12,000 in equity, moved his five children into one bedroom at his parent's house, and went on to build a 1-million-yard company.

Then there was Jerry, who grew up so poor, there was a box in the rear mudroom with shoes in it; the oldest child went to the shoe store every fall for a larger pair of shoes, and the rest of his siblings picked from the box the shoes that fit best. In spring, the shoes went back into the box, and everyone went barefoot all summer so the shoes wouldn't wear out. Jerry ended up starting a successful ready-mixed concrete, aggregate, and block manufacturing business.

These stories fascinate me. And while this industry continues to consolidate, there are still far more independ ent companies than multi-nationals. And as the baby boomers retire the next two decades, many businesses will be passed to the next generation.

So how does a family-run business plan for the passing to the next generation? Consider the following:

  • Before you do anything, determine the business's value. The owners must know what the business is worth. If they sell, a market value will always be higher than the value that would be placed on a portion of the shares to be gifted or sold to heirs.
  • Should the business be passed to the next generation or sold? This is a challenging question in a consolidating industry. A healthy business in a tertiary market probably has a solid future; a small player in a large, urban market faces the “corner grocery store” dilemma. Can it can survive while competing against well-funded, major multi-nationals?
  • Does your own estate have the liquidity to allow the business to be passed to the next generation? Most of our clients have a diproportionately large amount of their net worth concentrated in the family business. An estate planner can help; while the current estate tax law gradually reduces the percentage of the tax, as well as increases the amount of the exemption, the law sunsets at the end of 2010 and reverts back to the old formulas, so this whole subject remains very gray. A forced sale by the heirs to satisfy estate taxes could happen if the owner hasn't planned properly.
  • Are the heirs' hearts in it, and do they have the skills to succeed? Only one-third of family businesses are successfully transferred to the next generation; 13% are transferred to the third generation. Often, the next generation has a much different lifestyle than the founder. They do not share the same drive and commitment that their parents needed.
  • If you are going to keep the business and pass it on, do you have an exit plan? This is critical and requires the assistance of a CPA or qualified financial planner. If you plan this far in advance, there are many tax advantages for gifting the shares in the business to the next generation, utilizing the annual gift tax exemptions ($24,000 a year for a married couple) and the lifetime gift tax exemptions ($2 million for a married couple.)
  • Understanding the future outlook for a particular business, assessing the skill sets of the heirs, and understanding the overall financial structure of the owner's estate all drive a decision to pass it on...or sell.

    — Pierre Villere is president and managing partner of Allen-Villere Partners. You can contact him at pvillere @allenvillere.com or telephone 985-727-4310. Visitwww.allenvillere.com.