It really is amazing, watching how the business industry has shifted and changed over the years. We once saw the big box retailers trampling smaller businesses (family-owned or otherwise), and yet now we are seeing the smaller businesses begin to rise up yet again.
This is most evident when one looks at the country’s gross domestic product and the Fortune 500 companies; 50 percent of the former comes from family-owned businesses, whereas 35 percent of companies on the Fortune 500 list are family-owned.
One third of family-owned businesses stay in the second generation
When you think about the success of your family-owned business, lasting more than one generation is probably in the mix somewhere. You need to have a formal plan for the succession of your business.
You wouldn’t give your kids full access to the car without making sure you teach them how to drive it or without setting expectations on the “who, what, where and when” for using the vehicle. Why would you do the same for your business?
Passing a family-owned business from one generation to the next can be complicated for a variety of reasons. The fact that it is a “family” business is one of the biggest. Your child might not want the responsibility, multiple children may disagree on major decisions or the business ends up in the middle of a divorce battle.
Take the first; it is not uncommon for a family-owned business to leave the family after just one generation. Only 1/3 of family-owned businesses actually stay in the family by the time the second generation is up to bat.
How do you make your business last longer than a generation?
Ultimately, the transition from one generation to the next must be one that avoids as many headaches as possible. Easier said than done perhaps, but that is the reality of the situation. The first thing to do is to determine whether you have a kid who can or wants to succeed you. If not, you will have to consider an alternative.
Once you have determined that such a person exists, you should sit down with an attorney who understands business and estates so that you can come up with a solid succession plan.
What are a few things you will need to include or consider?
- Will this be a gift, sale or combination?
- When should the transition take place?
- What are the tax consequences of transferring ownership?
- What will each child’s role be in the business?
- How will your children resolve disputes?
- Who will get the final say for important decisions?
- Will children be full owners or only managers?
- Will anyone stay on as a manager?
Essentially, the key to a good business succession plan is to think about the details, formulate specific goals, put your plan into writing and update it – and have a professional on your side who has helped a few other business draft solid plans.