Family businesses are typically slow to embrace change, which is a fatal liability these days. A failure to innovate is a significant reasonfamily businesses don’t make it past the first or second generation.
Working with closely held family businesses throughout the years, we’ve seen the good and bad when it comes to succession. Here’s one that worked: Joe Ramon Sr. broke into the demolition business to help clear the way for San Antonio’s HemisFair in 1968. It was a leap of faith for his company, which was focused on construction and roadbuilding. Generations later, JR RAMON Demolition continues to be a local leader in professional demolition services. While that primary focus hasn’t changed since, the company continues to withstand the test of time by following advances in the industry and restructuring as needed. (You can read more about their story here.)
At the latest San Antonio Exit Planning Summit, we heard from Bjorn and Kris Dybdahl of Bjorn’s, the go-to store for audio/video needs in San Antonio since 1975. Many credit the store’s success to Bjorn Dybdahl’s innovative spirit. Bjorn’s was the first to bring custom installations of home theater systems to the area and introduced the local public to VCRs, CDs, DVDs and HDTVs. But Bjorn will tell you that the 2008 recession threatened the business due to his continued reliance on his gut instincts and disregarding changes his son Kris wanted to make. Thankfully, he started listening, and the pandemic pivots were easier to manage because of it.
The world changes. That’s what it does. And that’s why innovation for family businesses is necessary. Technology, customer preferences and demographics, supply chains, taxes…these factors not only continue to evolve, but many now change at an accelerated speed. If you’re a family business owner and you haven’t done so lately, it’s time to review whether:
You’re realistic about family succession. It often takes an outside perspective to identify how a family business may fail in the next generation. Ironically, that failure is often due to the exiting owner’s inability to let go and “let innovate.” You can pass your business down any number of ways, but be sure the method you choose has the business’s best interest at heart. That best interest may not be what has kept the company going since its inception. When other ideas come to the table, hear them out.
Your business structure still makes sense. When was the last time you innovated your business structure? Many family business owners pay too much in taxes or lose too much of what they’ve built due to divorce, death, and other misfortunes because they retained an outdated business structure. Often, splitting one tax-paying entity into two or more makes more sense as a business grows and diversifies. The ownership model is also something that can (and often should) change as a family business matures.
You can recognize the hidden tax savings of innovation. Innovation is expensive. But did you know that innovation can also be surprisingly tax-deductible? Experimenting with new technologies, materials or processes to overcome supply, labor, or other challenges may qualify you for research and development (R&D) tax credits. Purchasing or renting new or used equipment outside your normal scope can usually be tax deductible using a depreciation method or as an ordinary expense (depending on the circumstance). And working with non-profits, qualifying for government contracts, embracing sustainability, or sourcing supplies differently can all change your tax obligations, often for the better.
Succession planning doesn’t work when the focus is strictly on ensuring the business is run the same way from generation to generation. Innovation needs to be built into the game plan. Feel free to contact us with questions.