Often in a family business, especially one that is multi-generational, it is just assumed that the next generation will want to take over the business. This isn’t always the case and may cause trouble down the road. You should make sure that your successors want to take over the business and are able, in terms of knowledge and skills, to manage the business. If you plan to keep the business in the family, make sure that you spend time developing the business and leadership skills of your successor(s) well in advance. After all, they will need to find innovative ways to maintain profitable growth in the face of competition and the ever-changing business environment. This is why preparing your family members for a business transition and developing a solid succession plan is so important.
While an internal family transfer is typically less complicated than an external sale from a legal and transactional perspective, it may be quite complicated from a personal relationship perspective. You should have a plan in place before approaching your children or family members.
Some of the most difficult challenges include:
• Deciding who will succeed the current owner as President or CEO
• Preserving and building the company’s value during a transition
• Providing a smooth transition for owners, successors, and key employees
FAMILY TRANSFER CHARACTERISTICS:
Owners transfer the ownership of their businesses to their children or other family members by selling and/or gifting shares.
• Business Value: Fair market value
• Funding Sources: Business profits, bank debt
• Owner Involvement Post Sale: Whatever they wish, but 3 to 5 years is not unusual
• Tax Implications: Can be structured to minimize taxes by gifting shares and securing capital gains treatment
Business and Owner Suitability:
• Current owner wants the option to stay in control longer
• Family members who are ready to be owners and can be groomed to operate business
• Current owner may have estate tax exposure that is increasing as company grows
• Business that is profitable and growing enough to support all generations
• Business may or may not be marketable to outside buyer
Especially in small and family businesses, succession planning can involve a lot of emotional turmoil, and it is often helpful to turn to an outside, impartial group of advisors for help with navigating the process.
Some of the ways to overcome barriers during a family business transition include:
• Ensuring complete transparency during the process
• Developing strong family governance
• Putting together a strategic written succession plan
Make sure that you give yourself and your successors enough time for the transition process, and that you’re informed about all of the choices available so that you can make the best decisions for you, your family, and your business. Having a sound succession plan in place can take the emotion out of the planning and help ease the transition for both the business owner and his or her successors.
Contact the team to schedule a FREE consultation to discuss your future exit!
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