Planning to hand your brokerage down to your family members when you retire? The statistics on the business surviving aren’t that good.
More than 70 per cent of family-owned businesses do not survive the transition from founder to second generation, writes Susan Ward for About.com.
“In most cases, the ‘killer’ is taxes or family discord, both issues that a good family business succession plan will cover,” she says.
Ward recommends the following six tips for succession planning for any business:
1. Start business succession planning early
“Five years in advance is good,” says Ward. “Ten years in advance is better. Many business advisors tell budding entrepreneurs to build an exit strategy right into their business plan.”
2. Involve your family in business succession planning discussions
“Making your own succession plan and then announcing it is the surest way to sow family discord,” she says.
She goes on to quote Grant Thornton LLP: “Opening a dialogue among family members is the best way to begin the process of a successful succession plan – one where close attention is paid to the personal feelings, ambitions and goals of everyone concerned.”
3. Look at your family realistically and plan accordingly
“You may want your first-born son to run the business, but does he have the business skills or even the interest to do it?” asks Ward. “Perhaps there's another family member who is more capable. (continued.)
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“It may even be that there are no family members capable of or interested in continuing the business and that it would be best to sell it.”
Examine the strengths of all possible successors as objectively as possible and think about what's best for the business, advises Ward.
4. Get over the idea that everyone has to have an equal share
“While this is a nice idea in theory, it may not be in the best interests of your business,” says Ward. “Remember that management and ownership are separate business succession planning issues.”
She suggests it might be fairer for the chosen successor(s) to have a larger share of business ownership than family members not active in the business. Or it might be best to transfer both management and ownership to the chosen successor and make other financial arrangements to benefit other children in the family.
5. Train your successor(s) and work with them
“Your family business succession plan will have a much better chance of success if you work with your successor(s) for a year or two before you hand over the reins,” says Ward. “For solo entrepreneurs, sharing decision making and teaching business skills to someone else can be difficult, but it's definitely an effort that will pay big dividends for the business.”
6. Get outside help with your business succession planning
Lawyers, accountants and financial advisors are among many professionals that can help put together a successful succession plan. For example, they can help plan asset transfer tax strategies – for example, freezing the value of your interest in the company while you transfer ownership to your children – that will minimize taxes upon death.
