It takes a special kind of person to turn a dream into a successful new business. And for some, being your own boss and a successful entrepreneur is part of the American dream. That dream, however, can be short lived if careful thought isn't given to the succession of your business.
Family firms comprise 80% to 90% of all business enterprises in North America1
. Unfortunately, only one third of them are likely to succeed to the next generation2
. For businesses that have made it through a generational transition, planning early and carefully for succession is one of the most critical factors that made survival possible.
If you own a business, the earlier succession planning begins, the better, even if you plan to retire many years from now. Not only will you need time to explore your options and decide exactly what you want to accomplish, but planning early can also help minimize the cost to fund the transition. Besides, it is possible a sudden illness, disability or premature death may take you away from your business too soon, despite your plans.
Because business succession planning involves several disciplines, it is important to build an advisory team of professionals including your attorney, accountant, insurance representative and other key business- and estate-planning professionals who understand the intricacies of business, estate and tax planning.
Your advisory team can help you develop an effective business succession plan that not only addresses how you want both management and ownership to carry on, but also helps minimize income and/or estate taxes. For example, if you plan on keeping the business in the family, you may need to have a succession plan that focuses on estate planning in order to minimize transfer or gift taxes. On the other hand, if you plan to sell to an outside party, the plan will likely focus on an appropriate buy-sell agreement that places a higher priority on minimizing the income tax liability.
Your vision for your business's future
While an advisory team will help you develop and implement a plan to help you reach your goals, you will need to make a number of decisions based on your own objectives, hopes and dreams. Here are just a few:
- Who do you want to ultimately own the company? One of the most fundamental questions is whether or not your business can survive a transition to family members. If you believe it can, you also need to decide if ownership, management or both should stay in the family. Family disharmony can be the ruin of successful planning. Keep in mind, treating all family members fairly does not require everyone to get an equal share of the business. With proper planning, you can eliminate the sources of potential conflict, and still give the business the liquidity it needs to survive a transition in leadership.
- When do you want to turn your business over to someone else? Will it be based on when you retire? What would happen if you should become disabled or die unexpectedly? You can manage the financial risk of your unplanned, early departure by addressing these possibilities.
- What do you want from the business in terms of money, control, responsibility? What specifically, do you want to sell? Do you want to stay involved in some capacity or do you want to cut the strings and let it all go?
When it comes to one's own death or disability, most people prefer not think about it than to commit the time, energy and emotion involved in planning for it. However, if you want to preserve your company, and you have not gone through the business succession planning process, come to terms with whatever it is that has been holding you back and just do it. If you don't, the financial future for your family and business may be at risk.
1) "Family Businesses? Contribution to the US Economy: A Closer Look," Family Business Review, 9/03.
2) "Passing on the crown-Family Business: Family businesses, How a family firm can avoid a succession crisis" The Economist November 6, 2004
Advisor is a Financial Representative with the Nortwestern Mutual Fnancial Network