In the life of every business owner comes a moment when he/she starts thinking about retirement. And then, they are faced with the statistics which says that only about a third of the family-owned businesses survive the transition to the second generation.
Everyone is aware of the fact that a business owner cannot simply decide not to go to work anymore if they want the company to stay successful. In order to keep their companies among the above mentioned 30% the founders need to lay down the process and timelines for the transfer of business ownership and management – to make a sound business succession plan.
The first stage of planning consists of identifying the goal of succession and consists of answering the questions such as:
- what will be changed,
- who among family members is interested in continuing the work,
- do they have skills and knowledge which is necessary for the task,
- what will be the future role of the founder.
and communicating these issues with other family members and external experts. In order to make a good analysis one needs a reliable assessment of the value of the business, strong and weak sides of both the company and the heirs as well as the awareness of all the options at hand.
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It is very important that the planning process is given enough time – our experts at ExitAdviser say that 5 years before the retirement is the required time of start of succession planning, but we would like to add that it is never too early to start preparing the transition.
After that, the owner has to make decisions regarding the ownership and management and these issues tend to create disagreements (and even disputes and later law suites) between the family members. What we would advice is to always have in mind that ownership and management are two different aspects which should be dealt with separately, but these issues have to be resolved before the founder exits the scene.
Most of our clients face the problem whether to give equal shares of the company to all heirs or not, especially if some of them are more actively involved than others, and the question whom to leave in charge of the management of the business. These decisions should be based on the analysis described in the previous paragraph and in cases when there are more heirs, of whom some are actively involved in the business operations and others are not, it is usually a good strategy to find alternative ways to benefit other successors and leave the active ones bigger portions or even the whole business.
Having made those decisions, one needs to choose the model of transition. At this point you should probably use help of experts since the taxation and other costs related to business succession can vary significantly depending on the model. Giving the company as a gift produces the highest costs and is almost never used as an option, although it brings the smallest number of legal implications. If the children can obtain financial sources the buyout is the most elegant solution, but if not one should seriously consider buyback as an option or freezing the value of one’s interest in the company.
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Taxation and preferred options vary depending on the division of shares among the heirs as well as on the role of the founder after the transition.
With all this in mind, you should start the process of succession, with the realistic timeframe and constant work with your successors. And do not hesitate to seek help from experts who will provide advice, facilitate legal transition and minimize the taxes.
Remember, do not put this off, since the more time you invest in business succession planning, the more chances your company will have to have a long and prosperous life, led by your children. And then you could really enjoy your retirement with no worries.
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