Lacking a family succession plan? Here’s how to create one for your business

January 12, 2015 1
Lacking a family succession plan? Here’s how to create one for your business

Do you envision the family self-storage business eventually prospering under your children and grandchildren?

According to a 2012 PricewaterhouseCoopers survey of 100 family business owners in the U.S., more than half intended to hand over both ownership and management of the company at some point to family members. Another 24 percent planned to pass ownership to family members but bring in outside management.

Yet despite those intentions, 38 percent of the business owners lacked succession plans.

Family businesses fail when the second generation is “thrust in charge” without guidance from the previous generation, said Jeffrey Greenberger, a partner at law firm Greenberger & Norton LLP. Not having a succession plan means putting the assets you’ve spent a lifetime building at “high risk” of being lost or sold, he said.

Don’t let poor planning overshadow the next generation’s entrepreneurs. Here are seven factors to take into account when creating a succession plan.

1. Designate future ownership.

You’ll need to decide whether to keep your business in the family or sell it to someone else, said Michael Lyons, senior consultant and psychologist at the Family Business Institute, which offers consulting and other services to family businesses.

A few things to consider:

  • How much money will you need to finance your retirement?
  • Do you have enough money saved, or are you counting on cash from the sale of your storage facility?
  • Who will manage the business?
  • Will this be a self-financed buyout for the children who take over? For example, a son or daughter might pay Mom and Dad $500,000 a year until the sale price is paid in full.

“Someone gets to be 65 or 70 years old, and there is no money there, no pension,” Lyons said. “They start asking, ‘How am I going to continue going forward?’ It influences that decision.”

father and adult son

Don’t assume that you’ll hand over the reins to your children.

2. Assess the options.

Don’t assume that you’ll hand over the reins to your spouse or children. Leaving the business to your spouse could harm the family dynamic by pitting Mom or Dad against kids who’ve been active in the business. Be honest with yourself. You know which family members are responsible and which ones aren’t.

“You have to have the courage to say to a family member, ‘I don’t think you should get to run the business. I’m going to turn it over to someone else to run for you,’” Greenberger said.

3. Protect your interests.

Don’t leave the future of your business to the “law of unintended consequences,” said Kyle Krull, an estate planning attorney.

Consult an estate attorney to protect your business from potential divorces, lawsuits and bankruptcies. If you leave your business to your spouse upon death, make sure that it won’t end up being owned later by a new husband or wife who could disinherit your children. The more people your business passes through, the more you increase the chances of “losing to in-laws and outlaws,” Krull said.

4. Don’t draw up your plan in a vacuum.

You and your lawyer might come up with a great plan that reduces taxes but isn’t good for family members. A plan created without input from relatives and stakeholders could hamper the business’ management and effectiveness, Lyons said.

Determining the Way

A lawyer or business adviser can guide you through the succession-planning process.

5. Develop a management succession plan.

Designate who you want to step in and manage the business, and be ready if that happens sooner than expected. If someone had to take over your business tomorrow, would he or she know your computer passwords? Could that person locate your banker and other advisers?

Write down everything you do to run your business and file it in an “If I’m not here” operations manual to spare others the stress of hunting down vital information, Krull said.

6. Set up a buy-sell agreement.

This legally binding agreement determines which members of a business entity can buy your interest if you die unexpectedly or leave the company. For example, the agreement could obligate your estate to sell your share to a co-owner after you die. Two business partners might consider purchasing life insurance policies on one another so that each would have money to buy out the business in case the other partner dies.

7. Start early.

“Usually, business owners start too late in terms of succession and next-generation ownership,” Lyons said.

Most think they can get a successor up to speed in a year or two, but that training should be in place for at least five years and can take up to 10 years, experts say.

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  • Lucky13X

    These are some great tips.