Family Businesses Need Succession Plans

We’re dealing with a family member who should be retiring. Unfortunately she still owns the stock and is very controlling. We want to take the company forward, but don’t have the authority to do that. She has done some estate planning with experts who don’t seem to recognize that control of the stock is essential for getting on with building the company’s future.

THOUGHTS OF THE DAY: Most small businesses don’t survive the first generation. Use shares to invest the next generation now. Figuring out how to secure the senior generation’s retirement can be a challenge. For business owners who have spent a lifetime managing their company’s profits in order to avoid paying taxes, tax planning can take on outsized importance. Confidence in the next generation’s ability to perform has to be earned.

Not having a succession plan for the business to survive its founder is a recipe for disaster. While 50 percent of business owners plan to pass the business on to the family, only 15 percent go from Gen 1 to Gen 2 and only 5 percent make it to Gen 3. Thirty percent plan to sell to employees, only 5 percent do. Forty percent of businesses close or liquidate.

It’s time for every owner to work out a solid business transition plan, while they still can.

Sharing ownership and control empowers and engages people. Use it to your advantage. Passing ownership to the next generation can be a loaded topic. For owners who have spent a lifetime running the company the way they wanted with little interference from anyone, giving up control is tough. Do it anyway.

Transitioning ownership is fundamental for the company’s long- term survival. Find people who want the business. Give them a stake in the future. Work up to giving them full control, using a timetable and a set of agreed-upon conditions.

Many worry they won’t have enough to live well in retirement. When the company has been the major source of income and assets have been plowed back into the company to keep things running, there may not be enough funds for retirement.

Build a plan to grow company revenue and profit significantly, to pay for Gen1’s retirement and Gen 2’s additional costs. Figure out what the senior generation actually needs to retire. Buy time by elongating the horizon over which those funds must be assembled. Budget funds for your primary task: securing retirement, building the company and transitioning ownership.

For business owners who have spent a lifetime avoiding paying taxes, it’s hard not to focus on the tax bite of transferring ownership. That concern may be overblown. When it comes to tax planning, things keep changing. Estate plans set up before 2014 need to be reviewed. Increasing amounts of value can be transferred tax free — more than $10 million per couple as of today’s writing. Even if taxes are due, it’s better to grow and pay taxes than to let the business fail trying to avoid them.

Start distributing ownership to those who want the business while you’re able to participate in the process. Limit ownership to people inside the business. Use insurance plans to care for family members whose interests lie elsewhere.

A business with a future has a broad, well-trained, highly invested management team. Most owners think it’s even better if some of that team comes from the family. Be certain the kids want the business before you begin a succession plan.

The family’s next generation faces big responsibility and takes big risks when they enter the business. They must match and then beat, the outcomes of their elders. They have to learn the business, plan for the future, take action, face risks and be accountable for outcomes. They must prove themselves worthy by demonstrating increasing skill at running the business. Confidence in the next generation’s ability to perform has to be earned.

Use a development plan with hurdles and rewards that defines how stock is transferred. As the next generation steps up, avoid decision making stalemates by making it clear through ownership who’s running the company.

Looking for a good book? “Small Business Ownership Mistakes: What You Don’t Know Will Destroy Your Business,” by Amy Rose Herricki.

 

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