Transferring ownership across generations

We’re a two-generation company, and I find that ownership is very confusing. It feels like as long as the seniors are alive, we in the next generation will never own the company, even though we’re now doing the majority of the heavy lifting. On top of that, the seniors represent a huge financial drain on the company. Given what they’re taking out of the business, why would they give up control?

Thoughts of the day: Think about what control you want, and what leverage you have to get it. Figure out how to make the senior generation whole. Make sure the next generation is ready to run the business.

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Family business: Should I stay or should I go?

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I am working in the family business for my parents. I don’t have any shares and just general promises that someday it will be mine. I don’t agree with what my parents are doing and think they’re making some serious mistakes that could make this a tougher business in the future. What should I do?

THOUGHTS OF THE DAY: Kick them out. Leave. Work together to fix the problems. Decide how much you want to work in this business for the long term. Continue reading

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Keeping the business in the family

How do we keep our son and daughter happy, so that they stay in the business?

Thoughts of the Day: When it comes to figuring out what’s best for the family and the business, start with understanding the needs of both the family and the business. Learn how to work through disagreements and manage conflict among family members before attempting to work through succession planning for the business. Test participants before handing over the reins. Hand over the reins before it’s too late.

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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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Turning the Business Over to the Next Generation

It’s time to turn the business over to the next generation. They’re already here; they’re doing the work. And I’m ready to play, to do other things, to lay down the responsibilities I’ve carried for so long. What do I need to think about?

Thoughts of the day: Securing the business for the next generation is an act of maturity. First you have to figure out what you want to accomplish. Build a team of skilled local advisers to help you. Build a timeline to help you stay on track.

Letting go is hard for any business owner. The business is your baby, your legacy. When the next generation takes over, they’ll have their own ideas, which may be different from what you wanted. You’ll have to get out of the way.

When it comes to shareholders and long-term business success, the most productive ownership outcomes:

  • Are internal to the business, focused on and fully committed to achieving long-term growth, profit and stability for the business.
  • Are knowledgeable about the business and stay current with best practices related to growing a profitable, productive, long-term business.
  • Understand and commit to the value of written plans and skilled talent and tools.
  • Have rules resolving shareholder disputes and votes that end in ties.
  • Ask yourself, as you prepare to give up your shares:
    • How much money do you need to live on, for how long, and how does that compare to what the business is able to pay you for your shares?
    • Do you want to be done as a shareholder now or later; will incumbent shareholders stick around in case of delays?
  • How many family members work inside the business, who receive shares and what goes to family outside the business?
  • How ready are shareholders to act for the best interest of the business?
  • Discuss the rights and obligations of ownership with your next-generation candidates. For example:
    • Shareholders have the right to profit distributions in proportion to the percent of total shares they own and will have to pay taxes on those profits.
    • If the company gets into financial difficulty, shareholders may be asked to lend money to the company or otherwise provide financial coverage.
    • Shareholders will be expected to make time for the business — attend meetings, make major decisions, go on record by voting their shares, meet with a board, management team and outsider advisers.

Get incumbent owners to practice acting as governors of the business. Ask them to sit in now to learn how the business is run and decisions are made. Give them room to try their hands at ownership and watch how they handle themselves before you turn over shares.

Think through who will advise on the sale of the business. You’ll need an accountant and an attorney, as will the business and the future shareholders.

Some decisions will be governed by the business structure: S corporation, limited partnership, C corporation, etc. Well before it’s time to transition, get a handle on the trade-offs of each structure.

Make sure your advisers are experts in the laws of the state in which your business is registered. Check references and credentials, and verify expertise conducting successful shareholder transitions. Working with someone local is a real advantage; it makes it much easier to get all of your advisers together for discussion when needed.

Build a list of the things you’ll have to do, with due dates. Get your head around your own future outside the business. Prepare the next generation of owners/managers for success. Practice stepping back from active involvement. Factor in time for the transaction to unfold legally.

Looking for a good book? Try “The Complete Guide to Selling a Business” by Fred S. Steingold.

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