Family Business Succession Planning Needs to Start Early
Family business succession planning should be a priority for every company that wants to pass on its business to the next generation.
Sooner or later, everyone wants to retire. But if you own a family business, retirement isn’t just a matter of deciding not to go into the office any more. Besides ensuring that you have enough money to retire on, the whole question of what happens to the business becomes paramount. Who’s going to manage the business when you no longer work the business? How will ownership be transferred?
If the business will be carried on by relatives then it is important to have a family business succession plan in place to manage these issues, setting up a smooth transition between you and the future owners of your business. With family businesses, succession planning can be especially complicated because of the relationships and emotions involved – and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs.
Perhaps this is why more than 70 percent of family-owned businesses do not survive the transition from founder to second generation. In most cases, the “killer” is taxes or family discord, both issues that good family business succession planning will cover.
Do You Need to Change the Structure of Your Family Business First?
By its definition, the assets of a sole proprietorship or partnership are indistinguishable from the personal assets of the owner and as such the business cannot be willed or passed on. Only the assets of the business can be transferred. If you have a sole proprietorship or partnership and wish to have one or more successors continue the business, the best option is to form a corporation which by definition can continue to operate after it is sold (or upon the death of the owner).
Management, Ownership, and Taxes
Once you’ve sorted out the structure of your family business and turned it into a corporation if you need to, think of family business succession planning as broken into three main issues; management, ownership, and taxes.
It’s important to realize that management and ownership are not necessarily one and the same. You may decide, for instance, to transfer management of your business to just one of your children but transfer equal shares of business ownership to all your children, whether they’re actively involved in operating the business or not.
For many family businesses, family is the primary emphasis of succession planning. Whether you’re thinking about the future management of your business, how ownership is going to be passed along, or taxes, you won’t be able to help thinking about how your decisions will affect your family.
1) Start business succession planning early.
Five years in advance is good. Ten years in advance is better. Many business advisers tell budding entrepreneurs to build an exit strategy right into their business plan. The point is, the longer you get to spend on succession planning, the smoother the transition process is likely to be.
3) Look at your family realistically and plan accordingly.