19 Jul 2018
Family Business Transition Planning
First Focus: Address The Long-Term Success Of Your Business
Have you thought about family business transition planning?
You’ve worked hard over the years building your family business. Now you are looking ahead. You’re starting to consider transitioning your company to the next generation.
You may have already taken steps to employ next-gen family members in the business. Likely, you’ve begun training and mentoring those family members to take over.
But, given your continuing high level of involvement, their role has been largely focused on operational matters. You are still the lead person dealing with strategy, vision, and key planning for the success of the business going forward.
Like many business owners with transition on the mind, your instinct is to initially focus on such things as:
- How to structure the payout
- What up-front payout would be appropriate
- Assessing the valuation of the business
- Timing of the ownership transfer
- Tax implications of a sale, etc.
These are certainly key issues that need to be addressed. However, I suggest that you need to begin family business transition planning from a different perspective.
Consider These Two Foundational Elements
As a business owner starting to think about family business transition planning, you should consider two foundational elements:
- The actual mechanics of the business transition. That is, those transactional issues noted above, such as valuation of the business and the tax implications on transfer.
- However, before you go too far down that path, be sure to recognize the importance of making sure the business transition will be successful for the long term.
From my experience, here’s how to achieve long-term success in a family business transition. Focus your initial attention on making sure the business is transitioned to those who will be in a position to take over and effectively run the business.
This may seem obvious. But all too often business owners focus their initial time and thinking on structuring the business transition itself. They would be far wiser to focus on ensuring the people who are going to run the company have the skills and confidence it takes to do so for the long term.
What Happens When You Sell Your Business?
Maybe you’re intending to sell your business outright. In that case the above considerations for family business transition planning are less of a concern. If you have a larger business for sale, you will likely receive 100% of the purchase price either on the date of sale or over a relatively short period (2-3 years).
Now, say your family business is not that large, or not being purchased by a larger company. Timing for your payout will typically be much longer. Often the purchaser will pay a portion in cash at closing. Then they’ll either:
a) Pay an earn-out over time based on the success of the business
b) Or be subject to you providing vendor take-back financing
If you’re staying with the plan of business transitioning to the next generation, you may receive very little cash at the time of sale. You will be in a situation where the majority of the purchase price is paid out over time from the future profits of the business. Often the payout is designed to provide for the owner’s retirement funding needs – which could be over many years.
You can see that the long-term success of the business now becomes a very important part of family business transition planning!
The Importance of Education and Empowering the New Owners
You can engage the best professional team of tax and legal advisors available to structure the mechanics of the business transition. However, if you haven’t properly educated and empowered the new owners, the business could very well flounder – and your expected transition proceeds will never be fully realized.
As a family business owner, your biggest risk isn’t about getting the structure or valuation right, or about missing out on a tax advantage. Rather, it’s the continued success of the business, as most of the future payout will come after the ownership transition is completed.
It is absolutely critical that you spend your time, energy, money, and resources ensuring that your successors are confident, skilled, and ready to take over and continue growing the business.
Let’s be realistic. Getting your successors groomed and ready takes time. Planning for this business transition process and the mentoring of your successors will likely demand several years, not months.
As an owner, you have spent a long time – decades, perhaps – developing and building your knowledge and understanding of the business in order to make it successful. As you start the business transition process, you will need to assess the current leadership readiness of your successors. From that assessment, you can identify the areas to focus on in the next few years.
Business Transitioning Recap…
You’re a family business owner considering a business transition to your next generation. Here’s what you do first:
Think about all the areas that are critical for the success of your business. Then think about your successors. Could they successfully take over right now if they had to? If not, you will need to focus your attention on preparing them. At this stage, don’t hesitate to spend your valuable time and resources on these key areas rather than the mechanics of the business transition.
Only when your successors are ready to step in and take over should you shift your focus to structuring the ownership transition.
If you are thinking about or currently working on your business transition plan and are in need of assistance, please contact Rick Gendemann, one of our business succession leaders. We look forward to the opportunity to connect with you to discuss your business transition planning issues and address how we may able to work with you and your family on developing and implementing your successful business transition plan.
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