Q&A: Succession Planning and Family Business Considerations
Transferring the family business must be addressed from both a financial and emotional perspective. This process may take several years and should start early in the business life cycle. In many cases the goal is to transfer the business to the next generation – although a noble thought, it may not always be an option.
Q: How do I know for sure when it is the right time to exit my business?
A: You spent years of hard work making your business a success and you want to be sure that you have all of the right people in the right place at the right time when you are ready to exit and retire. This dynamic process, succession planning, is the key to ensuring the continued success of all areas of your business. There are a few key factors to consider as you determine the right timing for you:
Is there a capable successor in place?
Is this business prepared for ownership transfer? The business should be valued and assessed. What are the key positions and what are the job descriptions for those positions? Is there a strategic plan for transition in place? Have buy/sell agreements been developed?
Are you ready as an owner to let go of control? Have you looked at your future without your business?
Q: How do I begin to transfer my business to my child(ren)?
A: A successful transfer of the family business from parent to child is one that continues to thrive five years after the transfer is complete and has resulted in no lawsuits or feuds. According to research completed by the Family Business Institute 88% of current family business owners believe the same family will control their business in five years but succession statistics undermine this belief estimating that only about 30% of family and businesses survive to the second generation and 12% are still viable into the third generation.
With any type of exit planning the first step is for the business owner to identify his or her goals – however, unlike typical succession planning, it is critical with family-businesses that both parents (owners) are involved in the initial goal-setting stage of the transfer plan. Both parents/owners need to understand and agree upon their goals and communicate this to the children in this initial state of family business succession planning. Almost all spouses/owners have the ultimate goal to promote family harmony and treat children fairly, but it is ultimately up to them and no one else to determine what is considered to be fair.
As I’ve worked with so many Vermont family business clients over the last 25 years, I’ve come to appreciate how very unique each has operated and the various, crucial factors involved when it comes to handling the delicate matter of succession planning. There is no “one plan fits all” when it comes to the transfer of a business but there is one common feature among all transfers: Proper planning is critical to success – and the sooner, the better.
By, John Davis, CPA, CFP®, PFS, CVA
Davis & Hodgdon Associates has offered entrepreneurial advisory services including succession planning to Vermont businesses for over 25 years. Our associates are committed to working with and supporting our clients through each phase of their business. From a start-up company to a seasoned corporation, our firm provides the guidance and expertise to help businesses succeed and grow. For more information call 802-878-1963 (Williston) or 802-775-7132 (Rutland).