If you have started and grown your own business, you know how much time and work you’ve had to put into it. Building your own business requires a lot of sacrifice, and it can be tough to know how and when to begin transitioning a business to your children. Passing a business to your children will require tax and legal considerations, and of course you want to make sure the business continues to be successful even when you are no longer a part of it. You’re not alone, but you need to understand that the odds are against you unless you have a plan in place.
Forbes recently reported that LESS than one-third of family businesses make it to the second generation. That means less than one-third of business owners successfully transition their business to their children. Another half of those businesses that successfully make it to the second generation fail to make it to the third generation. That means that less than 1 out of 5 businesses will make it past the original owner’s children.
One of the biggest factors leading to the collapse of even successful businesses is the failure to plan how the business is going to pass from one generation to the next. For instance, parents may, while trying to be fair, leave a business equally to their four children. Unfortunately, a decade later when the business is passed on, the kids may not be able to agree on how to run the business which can lead to fights, stalemates, and ultimately lawsuits or some of the children leaving the business to start a competing business. These are major problems that could have been addressed had the family taken the time to really discuss the issues with an attorney and put together a plan.
We have seen some very successful plans implemented. However, we find that each family’s situation is a little different, so there is no “best” approach that fits everyone equally. For instance, some of the questions we want clients to answer as they decide how to transition their business include:
- Are all of your children going to actively participate? If not, do we want to have voting and non-voting shares? How are we going to incentivize those who work in the business day-to-day while still being fair to the ones who only own non-voting shares?
- How soon do you want your children to take over? The longer your timeline, the better for tax purposes. Also, do you want to retain the final say in business decisions even when you’re not a majority shareholder? We can work out the transition so you can give away a lot of the business for tax purposes without completely giving up control until you’re ready. It is not uncommon for parents to begin this planning ten or more years before they plan to retire, and the earlier you begin planning, the more flexible your options are.
- Do we need to start giving certain children some management experience now? It might make sense to have a child or several children each running different departments now so you can help them out if they need advice or make some mistakes. Better now when you can help than later when you’re no longer involved.
- For those of you who have children who aren’t interested in the business, what are some other options? Should you consider selling the business? Should you consider allowing your employees to buy you out through an employee stock ownership plan (ESOP)? If you want to prepare the business to be sold, it might mean beginning to clean some things up internally before putting the business on the market to make it more attractive to future buyers. We will need to discuss how to get a professional valuation and discuss how to market a business for sale. This can be a great discussion to have even if you’re a few years away from actually being ready to sell the business, especially if you’re hoping to get top dollar.
Again, it’s a lot to think about, but I tell clients that the sooner we begin having the discussions, the better off your family will be down the road. If you are trying to figure out how to transition your own business, we would love to sit down and discuss your options with you. Feel free to either give us a call or fill out the form below.