How To Transition a Family Business

While family business owners often want to pass on their business to the next generation or, at least, to sell it for a handsome price to a willing, motivated and competent buyer, the reality is that it is not easy to transfer a business to the next generation or, for that matter, to another corporation or entity.  While it has often been believed that business succession difficulties primarily concern taxes, my experience has been otherwise.  Even where governments clear the way for business transfers, the emotional effect of loosening control over a business that may have taken a lifetime or even generations to build can be traumatic.

If you own a business or intend to long range, here are some issues to take into account.

  • You need to make the business work without you.  Giving up control of a business does not just mean loosening the reins, it means you need to step back and see whether it could run on its own.  This is a tough transition for someone who has invested years of hard work (the expression “blood, sweat and tears” comes to mind) and begins to believe he or she is indispensable.  It is important not to be indispensable or the business might not, by definition, survive without you.
  • Gradual transitioning might lessen the difficulty of handing over the reins and give the newly designed business a head start.  Business giants like Steve Jobs as he was coming to the end, planned ahead considering who would handle the company best as successor.  In families, stock transfers over time can gradually increase the participation of the new person in charge.  If more than one child is involved, roles can be developed depending on the special skills of the parties.  If one child is going to assume a dominant role, then consideration should be given to how this affects inheritance overall and the perceived fairness in the family so that no one sabotages the arrangement.
  • Decide whether you want the business to continue after  you die or to sell.   Where others are involved in the business, there should be discussion in advance regarding buy-sell agreements that often are funded effectively by life insurance.  If you have children, family, or current partners who can effectively run the business, the time to discuss their involvement is now.  If your children and family are not interested, you may need, even if reluctantly, to look for another party to buy.
  • Decide whether your business is marketable without you.  Sometimes your business is primarily good will based on your unique skills and talents.  Sometimes it has great value or perceived value even if you are not around.

In an interesting short on-line article, “How Do Strategic CEO’s (and Owners) Work Themselves Out of a Job?” www.thiswayoutgroup.com, Kerri Salls makes the point this way:

“When you want to sell your business, you want to command the highest possible value.  For your business to merit the highest possible valuation, you must prove to the business appraiser and your prospective buyer that the value is in your business, not in you the owner…”

Salls goes on to note that the skills involved in divesting yourself of your business are very different from the skills involved in startup.  During startup, the business owner does anything necessary himself or herself to make it work.  Here is what Salls recommended you do if you want to sell.

“…1.  Create systems for everything.  If you have systems, make sure they are documented.

2. Delegate everything.  When your business can operate day-in and day-out without your hands-on oversight, you have a money making machine that will attract buyers…This one change takes time…Identify the three things you absolutely love to do in your business and the three things only you can do.  Delegate the rest…

3. Develop a succession plan throughout the company…

4. Plan for scalability….”

Scalability is an interesting concept.  It means that the potential buyer sees vastly increased  revenues without increased investment of time and money.  If you have it all there, you might be ready.  If not, you have a roadmap.  Then, know where you want to go after.  Many business owners start over with a new one.  If so, the term is “serial entrepreneur.”

About the Author Janet Colliton

Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.

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