Family businesses – from mom-and-pop stores to home-based businesses – power our nation’s economy, from job creation to gross domestic product. They provide 60 percent of American jobs and nearly 80 percent of new jobs created, according to Forbes. In addition, family businesses produce 50 percent of America’s GDP.
Mapping out your succession plan takes time and effort, but the payoff comes when your family’s next generation maintains and grows the business after you are gone.
The melding of business and family creates obstacles to the management, growth and sustainability of family companies. Unclear boundaries between ownership and management can lead to conflicts, jeopardizing your company’s future.
Successful succession plans aren’t guaranteed, of course, and you might have doubts about whether your children can (or should) really take over. Forbes cites a survey that found only 52 percent of business owners believe that the next generation can handle running the business on their own. Your fears may be well-founded because only one-third of family businesses successfully transition to the second generation.
Even the best of intentions doesn’t guarantee success in transferring a family business to the next generation, but a properly prepared succession plan can help turn the odds in your favor.
The key issues you should consider are alignment of family interests, interfamily disputes, balancing financial returns, and estate and inheritance issues. The factors that work against succession plans for family-owned businesses can include a reluctance to let go of control by a parent, the unwillingness of the intended successor to take over, accusations of nepotism and sibling rivalry.
Successfully working through these issues – a daunting task – can help you better prepare the next generation for taking over.
Step by step
Here is a suggested roadmap for you to follow:
• Establish goals and objectives. You need to have a collective vision, goals and objectives for your business before confident succession can take place. If you’re not sure of your family’s commitment, you might consider bringing in a professional manager to take over. When you’re turning the business over, you need to determine your retirement goals and cash flow needs going forward.
• Agree on a decision-making process. This includes the process by which family members are involved in making decisions, and it spells out a method for dispute resolution. Make sure you put the succession plan in writing and that you talk about the plan to family stakeholders.
• Work with an estate planning attorney who is experienced in asset protection, tax planning, business planning and creating family-owned succession plans to draft the necessary documents. This includes identifying successors, which means company managers and owners. You should identify active and non-active roles for family members, and you should identify support systems for the family successors.
• Your estate planning attorney will create a business and owner estate plan, and help you address tax implications upon sale or transfer of the business, divorce, disability or death. Minimizing taxes and avoiding delays in transferring stock to the remaining owner or spouse are also critical, and this means creating a buy/sell agreement that’s fair and that reflects the business’s value.
• Establish a transition plan. You need to pick a timeline and stick to it as closely as possible. Succession could be by outright purchase of the business, as a gift or bequest – or a combination.
Of course, just creating a written plan isn’t enough. Actively training the successors, giving them increasing responsibilities and measuring the outcomes help increase the likelihood of a successful transition of your family business to the next generation.