Passing the Business on to Heirs

Passing the Business on to Heirs

The owner of a thriving company wants to retire so he can travel, fish, play golf - in short, do everything his entrepreneurial talent has made possible. Fortunately, he has a daughter who wants to continue building the family business long into the future, a dream she’s nurtured since grade school.

To prepare, she’s worked in the office during summer breaks, and in college, she chose a major related to the family business’ products and services. As a graduate, she’s been by her father’s side for two years, learning all about the family business.

The ideal scenario for a transfer of business ownership, right? Not necessarily. Research shows that few family-owned companies manage to emerge unscathed from power shifts, with some estimates indicating less than half survive with the second generation in charge, and only 12% survive to the third generation. The most common reasons? Poor business practices (e.g. legal documentation, record-keeping) and failure to develop a formal, step-by-step plan to guarantee business continuity and on-going success.

Recent industry reports indicate that succession planning, particularly in a family-run company, is the key to a successful transition. Critical considerations within succession planning include: on-going attention to legal and financial records and documentation; acquisition of appropriate insurance coverage; a realistic valuation of the company’s worth; gradual transfer of responsibility and assets; and the establishment of the previous owner’s role under the new proprietor.

Succession Planning For a Bright Business Future

Succession planning identifies and develops suitable successors for key company positions before the founder or owner retires or is, otherwise, out of the picture. The goal? A smooth transition between old and new regimes, with minimal disruption to the firm’s activities. Savvy business owners begin the succession process early, paying particular attention to paperwork and legalities.

The following points are excellent guidelines for entrepreneurs who plan to pass on the business to heirs or other successors.

  • Begin succession planning long before retirement. Some consultants recommend that owners start the process between ages 55-65. Others suggest a three-year time frame, while some believe 10 or even 15 years isn’t excessive.

    A long preparation period enables entrepreneurs to identify likely successors and to train them in the responsibilities they’ll inherit. Passing on the company to a son, daughter or other close relative doesn’t automatically guarantee that the new CEO will be up to the job.

  • Choose a successor. Owners of family-run businesses typically select their offspring to inherit operations. When more than one child is willing to take over, it’s important to disburse responsibilities, ownership shares and compensation according to individual talents, corporate philosophies, work ethic and commitment among siblings and other relatives.

    When going outside the family to find a successor, the simplest method is to identify promising candidates from existing employee ranks. Consider technical and leadership skills, past performance and projected duties as new CEO.

    Allow ample time to prepare successors for upcoming responsibilities. Some experts advise at least five years of employment within the firm to learn the business front to back. At this point, the heir assumes more direct responsibility for daily business operations.

  • Confer with a succession planning team. This group includes potential successors, key employees, financial consultants and, if necessary, an attorney or estate planner.

    Topics to address with these experts include the company owner’s retirement timeline, his involvement after leaving the business, and planning for a smooth transition. Critical tasks include setting a target date to leave, with departing and future owners writing an agreement specifying clear benchmarks toward completing the transition; strategies to encourage valuable staff to stay on; and working with the prospective proprietor to insure a smooth transfer of power.

    Experts suggest that owners who eventually hand over the company to family members sell the new management team discounted shares of stock early in the succession process. This tactic allows offspring to build ownership before they assume full responsibility for company success.

    At this juncture, it’s also a good idea to update the existing business plan to accommodate the changing management situation.

  • Monitor and update legal and financial documents regarding succession. Wills, titles and other pertinent documents often see the light of day only when first executed. Most experts suggest that company owners, attorneys and accountants review, correct and update key documents regularly, from initial implementation through the retirement process.

    Keep in mind, too, that it’s important to address potential tax burdens with a tax attorney when planning for the future. Many business owners don’t realize that tax liabilities and the cost of settling an estate can eat up more than half of total assets.

  • Purchase insurance policies to guarantee continuity during and after a transfer of ownership. Sometimes, "retirement" is involuntary. For this reason, consider purchasing "key man" or "key person" life and/or disability insurance. The most critical function of these plans is to assure the firm’s survival in the event that the owner is injured or dies suddenly. Proprietors, likewise, should decide how they’ll provide for their own needs after retirement.

    As with estate planning documents, insurance policies must undergo regular review and revision to accommodate the firm’s growth, restructure or other changes that impact the company finances and oversight.

  • Conduct a thorough valuation before relinquishing ownership. According to dozens of experts, far too many owners allow successors (particularly family members) to take over with no clear idea of how much the company is worth.

The key to the successful transition of management within a company and a family is careful, detailed, long-term planning. Start by asking family members if they’re interested in taking over someday.

If one or more of your children or relatives IS the next CEO of your business, it’s never too soon to start the succession process.


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