How Do I Pass My Business On To The Next Generation?

Passing on business wealth to the next generation

How Do I Pass My Business On To The Next Generation?

From Your Multimillion-Dollar Exit, by Wayne Zell

Q: What challenges are commonly faced by family-owned businesses?

A: Family-owned businesses often encounter several challenges, including:

  • The death of a charismatic founder or family member who works in the business.
  • Inexperienced and unknowledgeable family members, as well as their spouses, entering the business.
  • Inequality in treatment between different generations and even within the same generation.
  • Family conflicts and psychological/behavioral issues leading to tensions within the family.

Q: What steps should be taken by family-business owners to address these challenges and transition the business to the next generation?

A: Family-business owners should have a clearly defined Management Succession Plan, including the following components:

  • Building a governance model that works for the family's future.
  • Clearly defining transition goals and the value to be received for years of work.
  • Developing a personal exit strategy, embraced and implemented by remaining family members
  • Determining who will remain employed, their compensation, and the duration of their employment.
  • Considering excluding family members with a sense of entitlement and no work ethic from significant business roles.
  • Establishing a family employment policy within the family-owned business's management and succession plan.

Q: How can ownership interests be transferred within a family-owned business?

A: Gifting during the owner's lifetime is one way to transfer ownership interests, especially to a child interested in running the business. To ensure fairness, less-involved children can receive other assets or have a portion of ownership placed in a trust managed by a team of family and outside advisors for the children’s benefit. Key decisions may be reserved for all involved parties, while voting control remains with the active child. Additional life insurance or allocation of non-business assets can also help balance the impact of distributing shares to active children.

Q: Are there any tips for charismatic founders in family-owned businesses?

A: Charismatic founders can ensure their children's active participation in the business by involving them from a young age and providing a comprehensive education in all aspects of the business. However, hiring professional managers may be necessary if the founder's presence overshadows family involvement or if the children do not possess the same skills and talents. A well-structured management succession plan can help manage this transition.

Q: What considerations should be made for different types of family-owned businesses?

A: A management succession plan's structure depends on whether the family business is a Rocket Ship (likely to thrive and grow), a Legacy or Lifestyle business (focused on family lifestyle and values), or in the event of an unexpected exit. It's important to find competent, incentivized managers who align with the company's and family’s vision and values and protect managers from unforeseen family decisions.

Q: How should the management succession plan (transition plan) be communicated to family members?

A: A transition plan must be communicated with sensitivity and care. This can be a challenging and emotional task. Engaging a family governance expert can assist in facilitating these discussions. There are also apps available to help organize documents, manage meetings, make decisions, and share information among family members, shareholders, and directors.

Q: What comes after addressing key details in the management succession plan for a family-owned business?

A: Once the management succession plan is in place, focus shifts to the mechanics and structure of the long-term portion of the plan, including the overall long-term exit strategy in a business succession plan. This exit could involve selling the business to a strategic buyer, private equity firm, or family office, or planning for the family business to continue operating in the owner's absence. Income and transfer taxes, especially if the business is valuable and the owner has substantial assets outside the business, play a significant role in this planning.

Q: What role does a planning team play in this process?

A: A business succession team should be led by an expert called a business succession expert or exit planner who creates the strategy for the overall plan and is crucial for its success. The business exit expert will first assist in creating a management succession plan for the business and then proceed to developing the business succession (exit) strategy. A business succession team can include other experts that the exit planner deems appropriate such as family governance experts, CPAs, estate planning and business attorneys, financial planners, insurance agents, or appraisers

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