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All in (or out of) the Family:  Who will inherit the family business?

Posted by DeAnna Alger, CPA on Dec 14, 2017 7:42:00 PM
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As a business owner, one often invests much time and energy into the day-to-day operations.  As a result, many owners are likely to sidestep or forget to take the time to establish a long-term plan for the business and simply presume their child will hold the same passion for the business and knowledge in the industry as they have. But, what happens if the child or children have no desire to inherit the business? 
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First, having a succession plan in place for the business is just as important as having a will for ones personal assets.  Without a succession plan, the company’s future, assets, and legacy are potentially at risk, regardless of who handles the business when an owner retires. 

Creating a succession plan is not a task that can be easily accomplished in one day.  A number of complex issues must be carefully analyzed, both for short- and long-term planning.  Check out a few of the key points to consider before drafting a business succession plan.

Identify a Successor

Oftentimes, entrepreneurs who founded and built a successful business over the years have a difficult time giving up control of the daily operations. Therefore, deciding who should take over the family business is one of the more challenging decisions that must be made.  For many business owners, the most likely successor for the family business is the adult child or children. Obviously, one will need to confirm that the chosen successor is interested and willing to take on such a role.

One of the advantages to this scenario is that the succeeding child/children have a firsthand understanding of the business’ core values, vision, and strategy.  Often, the children will ensure that the traditions and anticipated legacy will continue to the next generation. 

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In cases of the adult child becoming the successor, he or she likely has been working in the family business for many years and likely holds a lot of knowledge about the operations of the business.  

However, while a child may hold institutional knowledge, there is still much more to understand before they are ready for management and ownership.  The adult child successor, much like anyone else coming into a company, will need to be mentored and trained among all of the various leadership roles within the company.  

What if the child is not interested,  not the best fit, or simply is not ready to take over the business? Owners can also consider selling to key employee(s).  Internal key employees already know the business well, making the transition from owner to employee relatively straightforward. For some companies, institutional knowledge is priceless. Additionally, this could potentially provide an opportunity for the original owner to remain involved for a set period.  

Another option is to sell the business to an independent third party.  An outsider may help supplement the organization’s strengths as they are likely to be objective because they are not yet emotionally invested in the company. 

Develop the Skills of your Successor

Once a successor has been determined, an owner must make an honest assessment of the successor’s skills and abilities to ensure that they have the tools available to be effective in the future.  Learning how to manage the business can be seamless with the help of key members of the staff or possibly through an external training course.  Keep in mind however, clear objectives must be set and monitored on an ongoing basis.  

Develop a Plan for Retirement 

While most have their eye on ‘when’ to retire, one must also determine how to retire as it relates to financial needs.  The first step is to review all assets and income sources to determine how much money is needed from the business to live comfortably (in the same manner as prior to retirement).  Once that is determined, the owner and successor can decide the best route to transfer of the business.  If the owner is in need of cash flow, the business can be purchased outright (which can be accomplished through a variety of options).   Additionally, if cash flow is not as issue, an owner can gift shares of stock in the family business.

As you have read, developing a succession plan with the intent of passing your family business to the next generation can be a lengthy and sometimes complex process.  As with a personal will, the succession plan should be periodically reviewed and updated to ensure the covenants still fit everyone’s needs and the owner’s intentions will be carried out. 

As accountants, we have an in-depth understanding of your business and guide clients to plan, prepare, and execute the transition process.  While it is optimum to craft a succession plan when a company holds the ribbon cutting, know that it is never too late to begin the planning process.

If you have questions about your family business, creating a succession plan or ways to grow and build your business, contact me at dalger@zinnerco.com or any of the professionals here at 216.831.0733. We're happy to help and ready to start the conversation. 

Topics: business succession, deanna alger


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