Transition Tips For Family Businesses
The transition of ownership from one generation to the next can cause havoc in the family business and the family. Especially if the process occurs only once and without a significant investment in planning. Here are three ideas to help ensure success for your family business.
1. Hire the most competent advisors
Hire the most competent advisors (attorneys, accountants, financial planners and business consultants) you can find and afford.
Succession planning and succession management are complicated processes and requires different types of expertise. Not every professional service advisor has the special training and experience necessary to help a family business transition the business, wealth and wisdom to the next generation.
For instance, few lawyers, accountants, family therapists and psychologists are specifically trained or experienced in this field. You may wish to consider using the leading family business expert
to act as a quarterback for the succession planning process. All too frequently different advisors to the family business owner develop costly and ineffective sequential solutions to the complexities of succession. If someone is selling elevators, escalators are usually never recommended as a means of transporting people within a building.
2. Business valuation is a critical element of succession planning
There are many reasons to value a business. Unlike socks where one size fits all, one
does not fit all situations.
A valuation for sale to the next generation of family has different formulas than a valuation for sale to someone outside the family. Yet a different formula would be used for estate tax planning purposes.
Depending on the purpose of the valuation, costs can vary significantly. Less complicated valuations done for planning purposes can be very affordable.
Some family business owners value the business every year as part of their strategic planning process. Others use the valuation as a means for determining performance based compensation for key executives (phantom stock) rather than choosing to dilute the ownership of the stock to a non family key executive.
3. Funding is often a hidden or non recognized cost of succession planning
It is important to understand that the business may need to grow significantly in order to pay the transition costs which include taxes, insurance, professional advisors, setting up trusts and purchasing the business stock. Or, funds that would be available for expansion or to pay out to the family will have to be retained in the business for the transition. Either way, planning for this
cash flow requirement
will ease the transitioning of the business from one generation to the next.
A good rule of thumb is that the business needs to grow by at least 20 percent more than the normal growth pattern to offset the costs of succession and the cost of inflation - without disrupting the profitability and cash flow of the business.
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