Succession Planning for Your Business
When it comes time for retirement, should you sell your company or pass it along to your family?
A well-known business from our area experienced significant growth and a high level of prosperity for many years. The founder had a number of children involved. Then came time for his retirement. He left the business to be divided up between his kids, and a short time later, passed away. Since then, the business has been a disaster. Due to the lack of a specific succession plan, the children have fought over control, leadership, daily management, etc. Today, they’re on the verge of collapse and are no longer experiencing the success their father built over so many years.
This is just one of thousands of similar stories of next-generation business failure. Most of these sad accounts are due to the lack of a good succession plan. In fact, the Harvard Business Review states that 70 percent of next- generation family-owned businesses either fail or are sold before the next generation gets the chance for success. In spite of its importance, succession planning is a topic that you as a business owner may not wish to think or talk about, but avoiding this subject could very well be the cause of your business failing in the future.
When it comes to succession planning, you have three options to contemplate. You can choose to liquidate by selling your assets, paying off your liabilities, shutting down, and collecting any excess cash after the company is dissolved. You can sell to an outside party. Or, you can pass your business down to your family members. The first option is not typically a viable one because there’s almost always value in keeping the business operating in some fashion. So, let’s focus on the other two options: Do you sell your business or pass it along to your family?
A Family Affair
The primary advantage of passing your business on to your relatives is the opportunity to keep it in the family, where it will hopefully continue to be managed profitably, with an obvious end goal of continued success for you and your family. While statistics indicate that the odds are against next-generation success, there are many examples of the next generation taking a business to a much higher level than their predecessors did. To that end, the first question you must ask yourself is whether or not you have a son, daughter, or another relative who is qualified and motivated to continue managing your business for the next two or three decades in a manner that will create long-term success. And frankly, while that is an extremely difficult and objective question to ask yourself, you’re the best person to know the answer.
One common reason why next-generation businesses fail is because you have probably built your company from a rather small shop with a handful of employees into a much larger and more complex organization. Like all of us, you undoubtedly made many mistakes along the way, but those may have had a relatively small impact in the early stages and were perhaps much simpler to resolve. Now, you may be asking a son or a daughter to cut their teeth while learning to run a much more complex business in a more challenging environment. The mistakes they make along the way will likely have a more dramatic impact on the business than perhaps they did 30 or 40 years ago when you were in the same spot.
The family dynamic can also be a significant hurdle. If you do choose to leave your business to your children, understand that you may be setting the family up for some internal struggles. It’s one thing to take direction from a parent, but it’s an entirely different dynamic to answer to a sibling. And, even if some of your children are not directly involved in the day-to-day operations, from an estate planning perspective, they probably will be interested in ownership and how the business is being managed.
In spite of the inherent challenges, there are still many positive reasons to leave your business in the family. If you make that choice, in order to avoid some potential pitfalls you need to first identify the most qualified person to manage the company. Even though you’re leaving the business to your family, the most qualified person doesn’t need to be related to you. Many family businesses are successfully managed by individuals outside of the family. Often, business owners default to an oldest child because they may have been involved in the business the longest or they believe that to be the societal norm, but that may not be the smartest thing to do. You have the option of keeping as many of your children involved in the business as you wish – just make sure the most capable one is managing the business. This approach could result in some very challenging and uncomfortable discussions with your children, but it will give the business the best possible chance to succeed.
If you decide to sell your business, your family members may feel like you’re selling them out. However, if this is the best route to distributing the value of your business to your heirs, it might be the most unselfish thing you can do. Perhaps the most significant challenge of selling your business as a part of your succession planning is that you no longer have a place for your children and grandchildren to work. That may not sound like a big deal, but this will be a very difficult and emotional decision that involves the entire family. A family business is always much more than just a place for your family to earn money. Often, this is your legacy. There’s great pride among business owners who have built successful companies where family and friends can land a summer job, earn their way through school, or even build a career. This is pride that’s been earned and often becomes very difficult to walk away from. Nonetheless, selling your business may be the best thing for your family in the long run.
The biggest advantage of selling your business is that it becomes very easy to distribute its value to your heirs. But, some business owners may choose to cash out and spend that money on themselves upon retirement, and there’s certainly nothing wrong with that. Your success and the spoils that come with it are well-deserved. The bottom line: Cashing out allows you much more flexibility in terms of how you ultimately wish to manage your estate planning. This becomes a much easier task than passing it down to multiple heirs. This is also a much cleaner approach if you have one or more business partners outside of your immediate family.
A Head Start
Whether you choose to pass your business down to your heirs or decide to sell as you retire, here are a few suggestions to assist you in the process:
1. Begin now. It doesn’t matter whether you plan on retiring in the next year or in 10 years. You may even explore both options for the time being and lay out a plan for each. But put a plan together soon so you’ve prepared your business for the next phase no matter when that happens.
2. Secure a business valuation. Yes, this will cost you some money, but without actually knowing what your business is worth, it’s very challenging to make decisions about succession planning.
3. Communicate your plan. Don’t keep it secret from your family because this creates unnecessary chaos. If a worst-case scenario happens and you aren’t around to facilitate the succession process and you have neglected to communicate your wishes, there could be zero chance of future success for your business. Having an open family discussion about the future of the company will create a much higher probability of success than keeping your plans to yourself.
4. Hire experts to help. Using professionals such as accountants, attorneys, or financial advisors is absolutely necessary. There are far too many complex, legal issues to deal with on your own.
Succession planning is undoubtedly a very difficult, challenging, emotional task to accomplish. As a result, it’s often one we simply avoid, but the decision has to be made. However you decide to manage your succession planning, begin the necessary conversations and proper planning now. You will save yourself and your family a lot of unnecessary grief in the future and hopefully be able to implement a plan that will ensure the ongoing success of your company for many years to come.