For many people, the family business is their most valuable asset. It represents a considerable financial and emotional investment. Their wealth and dreams are tied directly to the performance of their family-owned business.
The issues business owners face are especially complicated because business goals and family needs are interwoven, and sometimes in direct opposition. However, the rewards of building and continuing a family tradition can far outweigh the difficulties.
PLAN FOR A TRANSITION IN OWNERSHIP
One of the greatest challenges for any founding owner is ensuring that the business continues after the founder steps out of the picture. Developing a succession plan long before it is needed is the best way to accomplish this goal.
Unfortunately, the majority of family business owners jeopardize the future of their business and their family’s wealth because they do not plan adequately in this area.
KEEPING IT IN THE FAMILY
Although most founding owners dream of passing the business to one of their children, a successor needs more than the family genes. Objective answers to these and other questions can give you an indication as to whether your child is right for the job.
Do you share common business goals
Is your child an entrepreneur, a risk taker
Do you respect your child’s management ability
If your child is the best choice, you need to develop a formal written plan that gives the child:
A solid understanding of the business
Hands-on experiences under direct supervision
Gradually increasing management responsibility
The visibility to earn the support and respect (Of the employees, creditors and customers)
If there are several children in the family, but only one is appropriate as a business successor, this causes additional concerns. The estate distribution must still be fair, without causing the business, management problems caused by minority shareholders. Non-management shareholders want to maximize (taxable) dividends - management shareholders want to maximize non-taxable compensation and accumulate capital for expansion.
HANDING OVER THE REINS
Transferring the responsibility to a successor can be a traumatic experience for any business owner. It can lead to serious conflicts between family members. Starting the process early, giving your successor adequate training and setting a firm retirement date, can smooth the transition.
AN OUTSIDER MAY BE BEST
If none of your children has the skills needed to run the business, you will need to consider an outsider. One of your present managers or a group of employees may be a suitable buyer. Your company’s business advisors can also help locate and evaluate an outside buyer.
Choosing the right successor for your business - even a non-family member - is critical to preserving your family’s wealth.
WHAT IS YOUR BUSINESS WORTH?
Determining the value of your business requires professional assistance, but in general, the value reflects the business’ ability to generate future income.
Maximizing the value of the business is sometimes important, for example, when putting it up for sale. When the goal is reducing gift and estate taxes, a lower value is better. To keep the value low, consider splitting the ownership among the family so no one person has a controlling interest. Various courts have ruled that the value of minority interests may be as much as 35% less than controlling ones.
Your financial advisor can perform the initial step - a business valuation analysis. With this figure, you can recognize the issues and determine the approximate gravity of the problems. Should you then wish to sell the business, you will want to consider a full appraisal by a qualified firm.
IS THERE MORE THAN ONE OWNER?
Any business with more than one owner should have an up-to-date buy-sell agreement. If you do not have one, you could be jeopardizing the future of your business. Here is what the agreement can provide:
A ready market for your shares
A means of valuing the business
A way to short-circuit shareholder disputes
Prevent less desirable outsiders from becoming owners
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