Take Steps to Protect Your Family Business
There’s nothing more important to you than family. However, your family owned business supports your family, so when it comes to protecting both of them, you need to consider your moves carefully.
Running a business presents tons of challenges, but passing a family business on to your children or other relatives can be even tougher. According to the Small Business Administration, only 33 percent of family owned businesses survive the transition from first-generation ownership to the next generation.
Why is it so hard to keep a family business intact? Sometimes, it’s because no one’s interested in running the business, but family businesses also frequently disintegrate because they lack succession plans.
To create a succession plan, your first step—and maybe the most important one—is to collect the thoughts and preferences of family members on their future involvement with the business. It’s essential that you know who really wants to do the day-to-day work and who’s capable. During these conversations, you’ll also want to discuss other key business-succession issues, such as the retirement goals and cash-flow needs of retiring family owners and the personal and financial goals of the next generation of management.
In developing a plan for the future, you will need to determine who will control and manage the business and who will eventually own it. These decisions will depend on multiple factors, such as the time horizon, goals and financial needs of family members.
Your succession plan could be based on a family limited partnership. Under this arrangement, you, as general partner, would maintain control over the day-to-day operation of your business, but over time, you could gift or sell limited partnership shares to your family members. And eventually, you would also relinquish control of the business to the person who will run it.
Another component of your succession plan might be a buy-sell agreement, which lets you name the buyer for your business—such as one of your children—and establish methods to determine the sale price. Your child could then purchase a life-insurance policy on your life and eventually use the proceeds to buy the business, according to the terms established in the buy-sell agreement.
We’ve just skimmed the surface. The transfer can be complex, so you’ll need to consult with legal and financial professionals. It’s important that you fully understand the business and tax implications of any succession plan, as well as the plan’s financial effects on all family members.
Once you’ve created your succession plan, you’ll need to work with your legal advisor to put it in writing and communicate it clearly to all family members. Surprises can be a welcome part of life—but not when it comes to transferring a business.
Jeff Ponte is a financial advisor with Edward Jones and previously served as vice president of sales with Mel Bay Publications. He can be reached at Jeffrey.Ponte@edwardjones.com or 855-581-1696.