Is Your Family Business Transferable?
Are you making decisions today that will increase the probability of having success in transferring your business and protecting your wealth?
Why is this question important? It’s because a majority of your wealth and largest asset is tied to an illiquid family business that is a source income and a means for accumulating generational wealth. In the next 10 years, to optimize value for their families and continue the business for the next generation or new owners, millions of baby boomer-owned businesses are expected to change hands. Sadly, many of these owners are not as prepared for transferring their illiquid wealth as the surveys tell us they believe they are.
NO PLAN IS A PLAN
Why are there family businesses that grow and thrive, while others risk continuing to the next generation or fail? In the book, “The Final Test of Greatness,” the authors argue that “in a world of economic complexity, the failure to plan and manage succession is the greatest threat to the survival of the family business.” Despite years of family business research, grappling with succession continues to be an ongoing challenge for many owners.
The studies paint a picture of contradictions between the owners’ wish to keep the business and the reality that they are not prepared for the challenge. Consider that:
- 70 percent of businesses fail or are sold before they are passed to the next generation.
- 84 percent want to keep the business and have a low mental readiness to exit.
- 73 percent of owners do not have a formal succession plan to deal with the most important financial decision of their life-preserving wealth.
There are many reasons why formal succession planning is so important, including:
1. Ensuring the Business Is Transferable
Don’t assume the future will be a continuation of the past. A transferable business is a business that has preserved its value; can be owned and operated by someone else today or in the future; and is treated as an investment, not a job. Are you exploring the different scenarios and trends that are impacting your business and industry? Are you confident your business will be transferable today or in the future?
2. Lowering the Risk of Transfer
Do you want to hold on to your business and risk the unexpected crisis of poor health, aging or the next recession? The longer you wait to implement a succession plan, the greater the risk. Businesses of any size can be disrupted by a voluntary event, or worse involuntary event such as death, divorce or lawsuits. These incidents could impact the value and economic viability of the company.
3. Financial, Mental & Business Readiness
Succession must address ownership, management, leadership, financial and culture matters. Along with assessing the strength and weaknesses of the company, it is important to quantify your emotional and financial dependence on the business. Can the business operate without you? Are you dependent on the business for income, financial or emotional needs? Ask yourself: Is my business OK? Is my family OK? Am I OK?
4. Protecting the Value
Do you know what your business is really worth? The need to get money out of the business for retirement or preserving family wealth may conflict with the financial structure and ability of the company to continue. Acceptable transfer value scenarios for lifetime and death, lending, retirement, gifting, estate tax and shareholder agreements must be evaluated.
5. Leadership Development
A critical value driver for every business and succession plan is the leadership team. Do you have a plan to develop leaders? The key is to retain key executive talent and align their goals and compensation with the value drivers of your company. Emotional and financial issues that can create clashes among active and inactive owners or successors, or those who are not equipped or capable of operating the business, also need to be addressed.
6. Improve Business, Financial & Estate Planning
Strategies and documents may be outdated, with different plans created over many years, resulting in fragmented estate, shareholder and ownership planning. This can be costly in missed opportunities. Is your planning coordinated with the estate, financial plan, shareholder agreements and overall family wealth plan?
7. Legislative Risk
Legislation may change both federal and state estate and other tax rules. Valuable business transfer and estate planning tools and techniques available today may be weakened or no longer available.
SUCCESSION IS A PROCESS
The risks and consequences of not preparing for the eventual transition of your company can be severe. However, a successful continuation plan depends greatly on your mental perspective and being proactive to lead the process.
Think about it as playing to win the game. It is a process and entry point for creating a new direction for the future of the company; not an end, but a beginning.
That one decision to get started will give you, and every stakeholder, the time to prepare for contingencies, identify successors and explore alternatives for growth, acquisitions, transfer within the family, management or selling. Most importantly, getting started on succession planning will reward you and everyone who depends on you with a sense of security.
Editor’s note: The opinions expressed in this article are the author’s and do not necessarily reflect the views of Convenience Store News.