All in the Family

Answer: Thinking about your business without you is frightening and exciting all at the same time. Your question indicates a family-based transition, so we’ll focus on that scenario.

Is the foundation set?

Is your successor, or successors, already involved in the business? If you plan on having the business taken over by a family member who’s not yet an employee, now is the time to add them to the payroll. Early involvement helps them understand operations, builds relationships, and increases credibility with employees, vendors, and customers.

Do they want the job?

According to Harvard Business Review, family businesses tend to outlast non-family firms. Yet only:

30% succeed with the second generation,

13% make it into the third generation,

and just 3% into the fourth generation.

The point is that once the founder isn’t in the picture, odds of continued success decline dramatically. The good news is that family ventures do tend to outlast other companies. Success depends on knowing that your chosen successor genuinely wants the role and is prepared.

Clearly defined roles

Succession planning can cause conflict amongst family members and key employees. You can help to head off tensions by having clearly defined roles and communicating how responsibilities will evolve as leadership changes.

Is it fair?

Many parents want to divide everything equally. If that’s not your plan, how will you compensate children not in the business? You might consider giving them a larger stake in non-business assets or naming them in an existing or new insurance policy as beneficiaries.

Who owns the business?

Many times, both spouses own 100% of the business or have gifted shares to their children yet still own a majority of the company. If one child is active in the business and the others are not, it can get tricky when it’s time to pass along the business. If the oldest child is involved with the business and other siblings aren’t, will the oldest want to buy out the siblings? Will siblings be okay relying on them for future income? This is where professional help with business valuations and price negotiations can be critical.

Is everyone on the same page?

Exit planning is smoother when everyone understands the goals. For example, we worked with a couple planning to sell their business to their son for $10 million in two years. They had no formal plan, and their son lacked the resources. Fortunately, upon further investigation, we found out that Mom and Dad didn’t need additional income, allowing us to design a strategic and gradual transfer process benefiting all parties.

How will it be structured?

Business transfers can be complex. Here are a few common strategies without going into too much detail.

• GRAT (Grantor Retained Annuity Trust): Helps transfer appreciating assets while minimizing taxes. This may create a meaningful difference in the net proceeds when considering a sale or transfer.
• FLP (Family Limited Partnership): Allows gradual gifting of company shares through a trust while family members operate a business together.
• IDGT (Intentionally Defective Grantor Trust): Shifts assets to the next generation while possibly minimizing income, estate, and gift tax liabilities.
• SCIN (Self-Canceling Installment Note): The buyer makes payments over time; if the seller dies before full repayment, the note is canceled.

As a CERTIFIED FINANCIAL PLANNER® professional, I’m happy to discuss this in more detail with you and your team of professionals.

Timeline?

The sweet spot of when to start planning a business transition is five to seven years before the actual event. Some suggest starting as much as 10 years before a planned exit so you can properly define roles, assess values, and create a timeline and clear roadmap for the transition.

What’s next?

Start the conversation with your CFP® professional sooner than later. Explore various planning techniques and begin discussions with those who will lead the business forward.

It’s hard to imagine handing over the business you built with your hard work, time, money, and energy into the hands of another. But chances are there will be a day when someone else takes the helm. A well-crafted succession plan is the best gift you can give your family, co-workers, and yourself. Creating this before it’s needed can help your business stand the test of time.

In the same way estate planning helps protect your loved ones, ensuring your wishes are carried out as intended, a business succession plan protects your legacy and provides for an orderly transition of management when the time comes. Stay focused and plan accordingly.