Many of our clients have family businesses that have been in their families for generations. Although they work hard to cause the business to flourish, one thought is not commonly discussed: a proper business succession plan.
A business succession plan is one that details who will continue to operate the family business once the main family member in charge must step down. Additionally, a sound business succession plan details how the changes will take place in order to avoid any inner family disputes. While it might seem daunting to do now, in the end it will save your family much time, money, and heartache.
Forbes has identified key points in their article, http://www.forbes.com/sites/allbusiness/2013/08/28/5-steps-to-create-a-viable-succession-plan-for-your-family-business/ , to consider before drafting a business succession plan:
1. According to the article, only a “third of all family businesses successfully make the transition to the second generation”. Although it is always preferred to have a family member continue to operate the business, “you must determine the importance of continued family involvement in leadership and ownership of the company” versus the need for professional management.
2. Making sure that your interests for yourself and the business will be properly protected upon your retirement is another key point to consider. There must be open discussion between whom you want to designate as your successor to make sure that they will continue to do what is best for the company as a whole, as well as your family.
3. Having a proper buy-sell/buyout agreement is definitely a good way to segway into a full-fledged business succession plan. When the current owner of the company considers retiring and wants to value the interest they have in the company, they simply refer to a balance sheet number. However, the article states that “the true value of a business should probably be based on an earnings capitalization model, a concept unfamiliar to many smaller family companies”.
4. There should be a proper decision making process for the company in times of succession. It is important to establish a method for dispute resolution if you anticipate your interests not being aligned with a family member’s. There should be open communication amongst family and shareholders to properly indicate who will have an active versus inactive role once the succession takes place.
If you currently are a small business owner, and would like to further discuss the importance of a business succession plan, please feel free to contact us for a complimentary initial consultation.
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