All good things must come to an end. You can’t run your business forever or you may not want to! At some point, you will sell it or step down. If you’re like most family-run small businesses (by small, I mean 50 or fewer employees), your plan is to take enough money out of the business to fund your retirement and pass the reins to a family member or close friend.
That’s a fantastic goal, but you may be making the same mistake most family businesses are making: You lack a plan to manage the succession.
Your first step is to determine who will own the business once you’re gone. You may be sure who will run it, but there are likely several people who expect to receive a part of it. There’s no easy way to make this decision. Our only advice is to be firm with your choice once you’ve made it.
Next, identify what you need to meet your retirement goals. If the business can’t be sold for enough to support your lifestyle, you may want or need to retain a percentage of the company and structure a buyout over time.
Crafting a succession plan
A succession plan is a formal document that outlines the procedure of transferring the business from the current owner to the successor. It explains who will be the new owners and how roles with change within the organization.
The plan also identifies any tasks or duties that must be managed due to the succession. For example, a big client might need to be personally reassured that the company will continue to deliver the same service. The succession plan might instruct an upper-level manager to visit the client’s office.
The succession plan should be written around a timeline. Transitions can be difficult, and often people will put off the details because they don’t feel right “doing dad’s job” or “stepping into Aunt Jane’s shoes.” Keep the transition moving by giving each milestone a hard deadline.
Finally, the plan should outline any goals the outgoing leadership wishes the company to follow. The new leadership can obviously override these goals, but at least the company will have some direction in the interim. They also assure the employees that the company is still pushing forward.
Preparing for the succession
The outgoing business owner needs to take some special precautions to protect themselves. He or she must absolutely consult with a corporate attorney (someone who represents the outgoing owner, not the attorney who also represents the business) and an accountant with estate planning experience.
In most cases, companies aren’t transferred freely. They are sold to the younger generation. Discussing sale prices with family can be difficult, so it’s best to manage the process through attorneys and representatives like a typical sale.
If the outgoing owners and incoming owners plan to have a social relationship outside of the business, it’s critical that neither try to take advantage of the other. Everyone should be prepared to accept a fair market deal. Unless the business is sitting on a pile of cash, it’s best to arrange a financing structure, so the incoming owners aren’t burdened with cash flow problems, but the outgoing owners are still compensated.
There are ways a careful estate planner can help structure the sale to avoid taxes and make the transfer process smooth. For example, if the owner were to die without a plan in place, the company’s transfer may be administered by the probate court, which is a long, arduous process that no one wants to go through.
Time to beat the odds.
We don’t mean to seem grim, but many family businesses fail to survive the first succession. The rates for second successions are even lower. However, those failures usually stem from a lack of planning. Knowledge is power so acknowledging the statistics are important! The key is to create a solid plan AND have a strong support system for both the outgoing and the incoming leadership all while ensuring your team and clients feel confident that your company will not only survive the transition but thrive!
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