Eighty percent of Maine’s businesses are family-owned. When asked who will take over the family business when the current owner retires, 88% of owners believe their children or family members will succeed them. However, according to The Family Firm Institute, two-thirds of family businesses fail to transition to the second generation and only 12% make […]
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Eighty percent of Maine's businesses are family-owned. When asked who will take over the family business when the current owner retires, 88% of owners believe their children or family members will succeed them. However, according to The Family Firm Institute, two-thirds of family businesses fail to transition to the second generation and only 12% make it to the third.
The primary reason for these surprising statistics is a lack of family business succession planning. While 96% of owners agree a plan is important, only 13% surveyed actually have one that is current and in writing. Such planning is understandably challenging, especially when family dynamics and emotions are involved, and topics like aging, death and financial affairs can be difficult to discuss. But if you want to pass your business on to family when you retire, it is critical to have a realistic plan in place to do it.
Plan now for later
The key to successful succession planning is to start the conversation with successors early — and to think about it both in terms of what the business will need for ongoing stability and growth, and your personal needs as you transition out of the company. This conversation creates the framework to allow you to begin to separate your personal financial needs from the needs of the business. With this framework as a basis, the exit strategy begins to crystallize, and it is often easier to make other decisions down the road.
For the transfer of business ownership and control from parent to child to be deemed “successful,” there are three components that should be in place:
1. Strategic vision
While many parents hope their children will take over the family business someday, sometimes the next generation is not necessarily on board. A successful transition plan begins with a shared vision for the company that takes into account the point of view of all family members. Questions to guide the discussion include:
- Is continued family ownership desired, or is sale to a third party the best option for all shareholders?
- Who will manage the business going forward? What management and leadership skills do they need, and how will they acquire them?
- If there will be non-active owners in the business, what is their role in decision-making, and how will assets be equitably distributed?
- What do you as the current owner need to successfully retire from the business, and will you have a role going forward?
The goal is to reach a consensus about the future of the business that incorporates each individual's aspirations.
2. Continuity plan
While succession planning for down the road is important, the smart business owner also puts plans in place to preserve and protect the business in the event of sudden, unexpected situations. If you were to die suddenly or become incapacitated, would your successors have the resources they need to run the business without you? Is there a buy-sell agreement in place that provides for a reasonable valuation for the business if it were to be sold? Key to this plan is a realistic determination of both short- and long-term needs of the business.
3. Tax-efficient wealth transition
Critical to family succession planning is determining how to transfer ownership in the most tax-efficient way. There are asset transfer tax strategies to help you do this, such as freezing the value of your interest in the company while you transfer ownership to your children. It is important to work with a team of trusted professionals, including your lawyer, accountant, banker and wealth advisor, to help you and your family structure a transition plan that is best for all of you and the future of your business.