How To Pass On Your Family Business

August 18, 2015
How To Pass On Your Family Business

You have spent 15, 20, or even 30 years building up a business that you plan to pass on to your family.   Now, most of your time is spent laying out your future travel schedule, perfecting your golf game, or thinking about lazy Sunday afternoons hanging out having fun.   You are finding it hard to get away from the business because it still requires your attention, and now you are wondering whether or not your son or daughter are even interested in taking over this family business that runs like a machine.   How will you be able to pass on your family business that you have worked so hard for your entire life?

Unfortunately, most business owners are so frantic running their business to create top line revenue that they don’t spend the time to lay out their own succession plan.   If you pass the business on to only one child, will there be some sort of sibling rivalry?   If you die, what will happen to the business today?  If your children don’t take it over, have you identified a quality successor who can run and maintain the business?  Here are a few thoughts and options to consider when passing on your family business.

  • Sell The Business Outright To A Third Party
    If you haven’t done any sort of formal business valuation, it is worth it to get an idea about what your business is actually worth at this time.   Just as is the case with real estate, many business owners become sentimentally attached to their businesses.   Thus, they often feel it is worth more than it actually may be in the marketplace.  Depending on your business, you may be required to stay on with the new company anywhere from six months to several years depending on the type of business and the overall transition.   You may be the kind of business owners that just wants the cash to walk away, or you may look for a third party that carries the same values you have built in your organization.
  • Grooming A Family Member Or Internal Successor
    Finding a successor in your business won’t be as easy as you may initially think.   After running your business as long as you have, your employees and customers have become accustomed to a certain way of doing business.  They have become used to your style of running the business.  It will typically take three to five years to really groom in a new operator for your business.   Remember, you have built it from the ground up so you naturally know all the skeletons and the ‘why’ certain parts of your business run the way that they do.   If you do select a family member, treat them as you would any independent successor you would have brought into the business.
  • Let The Business Run Out Of Air
    One analysis you will have to do when you sell your business is to determine whether or not the cash (net of taxes) from the sale of the business will be able to replace the income (and fringe benefits) you currently earn from the business.   If you have built a lifestyle business and there isn’t significant intrinsic value in the business, you might just work the business down until it doesn’t run anymore.   This means you wouldn’t be putting in the 60 hour work weeks, and just let the business continue to bring in income until it slowly erodes away.   This isn’t the easiest to handle from an emotional perspective, but might make the most sense financially.

There are a slew of other options to look into including employee stock ownership plans, but if you plan to pass the family business on down the road it is important to get all of your options out on the table to ensure you make the right decision for you and your family.

Written by: Ted Jenkin
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