There is an old saying, “The best time to plant a tree was 20 years ago; the next best time is now.” This saying can be used when thinking about future planning for your family business. Only one-third of all family businesses successfully make the transition to the next generation. Many different factors can play into this statistic, but almost all of them can be related to the lack of proper family planning.
Most family businesses never have an actual plan in place for the transition of owners, and this can cause major issues when the time comes for the transition to happen. Sometimes, nothing has been put in place, and the transition happens because of a death or tragedy that forcefully leaves the next generation in charge. Below are some simple considerations to make when you are preparing a succession plan.
- Identify who is interested. Most family businesses struggle tremendously after the transition process because the members who inherit the business want nothing to do with it. They either already have jobs, or they have no interest in continuing the business. On the other hand, some situations have multiple members that want to run the company, and there is no true hierarchy or plan set in place. The disputes and clashing management styles can end up running the business under.
It is important to have conversations and plans in place with members to determine who is interested and who isn’t. Once this is determined, set up a plan outlining who will be responsible for what, and start getting them exposed to the business.
- Don’t lose key contacts. Most family businesses are built strongly on the owner’s relationship with vendors, customers and suppliers. When the owner transitions out, key driving factors of the business can be lost. To ensure that your transition out of the business doesn’t hurt your company’s relationships, introduce the successor to key business contacts so that they can build their own relationships and trust.
- Consider changing your business entity. Planning the transition can mean changing the entity of the business. If the company is a sole proprietorship, it may make more sense to change to an S corporation or C corporation. These changes will allow you to have stock in the company, which is easily transferrable.
Stock can be purchased, gifted or inherited very easily without having to halt business operations. Having stock also allows numerous owners, such as children, to have different amounts of shares, which is important if multiple children want to be part of the business but have different roles or responsibilities.
- Have a business valuation performed. Families are often faced with the difficult decision of whether to sell, close or pass down the business to family members. Passing down the business involves several complicated issues, such as how to logically divide the business and allocate value. Business valuations help owners establish a baseline value that they can use as a springboard for future succession or sale.
In planning for succession, it is critical to work with many experienced advisors — starting with a business valuation advisor and CPA — to review your company’s financials and determine its value. A valuation advisor can help you, your family and your attorney customize solutions to meet your goals and special needs. Read more about business valuations here.
Succession planning for family businesses is typically overlooked or put off because people are unsure about where or how to start. There doesn’t have to be a formal business plan in place. Sometimes, it just takes a simple conversation. If you are in the process of planning for the future, these are some simple ideas to help you get started. If you want to learn more, check out this article on succession planning.