Family business succession planning is the tool you need to help your business endure for generations to come.
When you’ve spent years of your life working hard to build a successful business, you want to be sure it survives and remains strong even after you step away from the helm. Your retirement doesn’t need to mean that your business fails to thrive – as long as you have a smart succession plan in place.
Using a few thoughtful strategies can help you plan for a happy retirement and the health of your family business for the next generation.
Understand Family Dynamics
Owning a family business means that there are family dynamics at play during big decisions as well as business considerations. Expect strong feelings to rear their heads as you and your family plan for succession.
There is a tendency for family business owners to create a succession plan on their own and then announce the finalized plan to their family members, but this is a surefire way to hurt feelings and cause friction. It’s better to discuss the plan with your family members before you make any decisions. That way, you can identify who wants to be involved in the business in some capacity and who is happier sitting on the sidelines. This will help decrease any hurt feelings and avoid surprises.
And some squabbles over money and/or control of the business are simply unavoidable – it’s a very rare family business that doesn’t experience this during a transition. Be prepared to handle the emotions of your family members – and your own – as you work through potential plans for the future.
Restructure as a Corporation
When you set your family business up years ago, you may have simply defaulted to creating a sole proprietorship structure. While that likely worked well for a while, it means the assets of your business are indistinguishable from your personal assets. And that makes things more complicated when you transfer the ownership of your business.
Most businesses that start out as a sole proprietor transition to an S-Corporation or LLC (the swiss army knife of business entities) when they hire employees or after a few years. This is oftentimes recommended by the business attorney or CPA. It is rare that a company remains as a sole-proprietor for a long time but, in some cases, companies do. There can be significant tax advantages to being taxed as an S-Corporation or even a C-Corporation with the tax law change of 2017. However, that tax law change will probably be extinct soon.
Think about separating your business and personal assets by restructuring your business as an S-Corporation or an LLC. This means that your business can continue to operate after selling it or transferring ownership and/or management.
Use Voting and Non-Voting Shares
While you may want all of your children and other family members to benefit financially from your business, many of them may not have the interest or capability to manage your company well.
If this is the case, then you should consider setting up separate share classes. You can make as many family members as you like shareholders in the business, which means they can receive dividends. But you can divide those shares into voting and non-voting shares, so that only some of the shareholders can help shape decisions for the company.
This enables you to give those family members who are more involved in the management of the company a larger say in business decisions.
This can preserve the integrity of your business while still providing financially for everyone.
Caution, you have to be careful of even a small level of involvement by absentee owners. It can be extremely frustrating for the family member running the business to have to answer to siblings that are not involved. Sometimes it is wiser to carve out other assets for non participating family members or have the business fund life insurance to compensate these family members for their share of the business.
Plan Well Ahead
Many business owners avoid succession planning until the very last minute because they don’t want to think about giving up control of a company they have worked hard to build or because of family dynamics. But succession planning works best if you start as early as possible. In fact, many experienced business advisors tell business owners to build their succession plan into their business plan from the beginning.
But if you haven’t done this, it’s not too late. Ideally, you should start your succession planning at least ten years ahead. . If you haven’t, that is not something to worry about, just get the ball rolling now. Five years or even a few years could be ample time, especially if you have good communication within your family. While five or ten years might seem like a very long timeline, it helps ensure the future of your business. You’ll have more time to carefully make the right decisions if you’re not in a rush.
Also, life is unpredictable – you may find you want to retire earlier than planned, or have a health issue that requires you to suddenly step down from your business. If your succession plan is already in place, you won’t be caught having to make such an important set of choices at the last minute.
Do What’s Best for the Business
As you already know from running a family business, it can be hard at times to balance the interests of family members with the needs of your business. But your succession plan is first and foremost about the business, so you should put the needs of your business first.
It can seem like a good idea to give your family members equal shares, but that puts your chosen successor at a disadvantage. You also may have a certain successor in mind, but that child or family may not be interested in – or capable of – running the business on their own.
Be realistic about your choices and put the interests of the business first when making your succession plan.
Hire the Right Help
Succession planning is a long and complex process – there are family dynamics, legal structure and documents, and tax consequences to consider as well as all sorts of business decisions to make. Trying to do it all yourself is a recipe for leaving important tasks undone that may hurt the future of your business, its value, or the health of your retirement savings.
It’s vital to enlist the help of professionals who can ensure you’re doing everything you can to protect yourself, your family, and your business.
Succession Planning with Bartley Financial
After growing up working in his family’s business, Robert Bartley now uses his personal business experience and financial acumen to guide other business owners in Andover, MA and Bedford, NH toward their most successful futures. He and the rest of the Bartley Financial team coordinate your business and personal goals and, in the process, enhance your business’ attractiveness to employees when you need to hire and buyers when you want to sell.
Bartley Financial’s fee-only structure ensures that your costs are forecastable and unencumbered by commissions or other hidden, fluctuating, and unpredictable charges. Business owners are then able to focus instead on what really matters: the success of their small business.
If you’re looking for a fiduciary financial advisor who can guide you through the complicated process of succession planning, contact Bartley Financial today and retire knowing your legacy is safe.