There’s nothing more important in the world to you than your family. However, your family-owned business probably helps support your family. So, when it comes to protecting both your family and your business, you need to carefully consider your moves.
As you know, you face plenty of challenges to keep your business running smoothly — but it can be even more difficult to pass the family business on to your children or other relatives. In fact, according to the Small Business Administration, only 33% of family owned businesses survive the transition from first generation ownership to the next generation.
Why is it so hard to keep a family business intact? Sometimes, it’s because no one in the family is interested in running the business — but family businesses frequently disintegrate because of the lack of a succession plan.
To create a succession plan, your first step — and possibly the most important one — is to collect the thoughts and preferences of family members on their future involvement with your business. It’s essential that you know who wants to really do the day-to-day work and who is capable. During these conversations, you’ll also want to discuss other key business-succession issues, such as the retirement goals and cash flow needs of retiring family owners and the personal and financial goals of the next generation of management.
In developing a plan for the future of your business, you will need to determine who will control and manage the business, and who will eventually own it. These decisions will depend on a variety of factors, such as the time horizon, goals and financial needs of the family members involved.
Your succession plan could be based on a family limited partnership. Under this arrangement, you, as general partner, would maintain control over the day-to-day operation of your business, but, over time, you could gift or sell limited partnership shares to your family members. And eventually, you would also relinquish control of the business to whoever is going to run it.
Another component of your succession plan might be a “buy-sell” agreement, which allows you to name the buyer for your business — such as one of your children — and establish methods to determine the sale price. Your child could then purchase a life insurance policy on your life and eventually use the proceeds to buy the business, according to the terms established in the buy-sell agreement.
We’ve just skimmed the surface of techniques that might be used alone or in combination to carry out your business succession. The transfer can be complex, so you will certainly need to consult with your legal and financial professionals. It’s important that you fully understand the business and tax implications of any succession plan, as well as the financial effects of a plan on all your family members.
In any case, once you’ve created your succession plan, you’ll need to work with your legal advisor to put it in writing and communicate it clearly to all family members. Surprises are welcome in many parts of life — but not when it comes to transferring a family business.
You want to leave your family a legacy. And if that legacy is the family business, do whatever it takes to pass it on in a manner that benefits everyone involved. This will take time and planning — but it can be well worth the effort.
Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway.