Family-owned businesses are the backbone of the American economy. Unfortunately, successfully transferring a family business to the next generation is often a challenge, despite the opportunity for ongoing job security and family legacy. In fact, only 19 percent of family-owned businesses survived their first transition to a family member in the last five years, according to the Conway Center for Family Business.
As a business owner, balancing your long-term objectives with family relationships can be challenging when transferring the family business. While clear documentation and open communication can make the transition easier, you’ll want to keep a few things in mind as you plan your succession.
Before transferring the family business, consider the following factors:
1. Your Readiness
Giving up control of the business you worked hard to build isn’t always easy. Indeed, many business owners experience a sort of identity crisis as they transition into retirement. Just because you plan to retire at a certain age doesn’t mean you’ll be emotionally prepared to leave your business.
Of course, you’ll also want to assess your financial circumstances prior to retiring. For example, you should ensure the proceeds from the sale of your business, your savings, and any other sources of income are enough to maintain your desired lifestyle in retirement. If you have dependents, you should determine how much longer they’ll need your financial support and whether you can continue to meet those obligations if you’re not working.
Ultimately, successfully transferring the family business depends on your emotional and financial readiness leading up to the transition. It’s generally advisable to give yourself a long runway so you can prepare accordingly.
2. The Next Generation’s Readiness
According to a study by McKinsey & Company, family businesses that stand the test of time usually share a meritocratic approach to management. Yet choosing a successor isn’t always straightforward when relationships are at stake. You’ll need to decide if treating all family members equitably is the right decision for your business long-term.
Not all (or even any) of your children may be willing or able to assume the responsibility of business ownership. As you plan your succession, make sure your potential successors are prepared to invest the time and capital necessary to sustain and grow the business. Even if they’re willing, they may need additional training and education before they’re ready to assume leadership. Remember: your successors’ readiness is just as important as your readiness when it comes to successfully transferring the family business.
3. Family Dynamics
Only 34 percent of family-owned businesses have a robust, documented, and communicated succession plan, according to PWC’s 2021 Family Business Survey. Even if you don’t think you need a formal succession plan, it can be extremely helpful to define and document what you expect of your children and the future of the company.
For example, it may make sense to retain key employees or bring in additional expertise to help smooth the transition. Or if you’re naming more than one successor, you may want to designate responsibilities based on your children’s strengths. No matter your wishes, putting them in writing can help you avoid potential conflicts down the road.
4. Your Long-Term Vision
The long-term success of any business requires a balance between sticking with what works and embracing innovation and change. When it’s a family-run business, there may be an even stronger sense of tradition tied to the business’s success. If protecting your business’s values is a priority, it’s important to discuss it with your children before handing over control.
One way to avoid a family feud is by establishing guidelines for major business decisions and disagreements. In addition, you may want to involve your children in day-to-day operations before transitioning the business so they can learn the culture. Ultimately, open communication and thoughtful planning can help keep your vision intact after transferring the family business to the next generation.
5. Your Financial Goals
Finally, an important consideration is how to structure the eventual sale of your business. You have several options when it comes to transferring your business within the family. For example, you can set up a grantor retained annuity trust, transfer your shares, structure an installment sale, or leverage life insurance.
If you haven’t done so already, you’ll want to obtain a reliable business valuation. You may also find it beneficial to assemble a team of trusted advisors. They can help you identify creative transfer solutions to maximize your payout while protecting your children’s interests.
Transferring the Family Business Requires Planning
Transferring the family business to the next generation can be an exciting yet daunting task. The process is often complex and emotional. However, beginning the planning process early can help ease the transition and preserve your family’s legacy over the long run. Working with a trusted advisor who has experience navigating family business sales can also increase your chances of success.
Are you ready to plan your eventual exit and prepare for retirement? Oak Capital Advisors specializes in the unique financial planning needs of business owners. To get started, please request your complimentary retirement readiness assessment.