Every business and family situation is different, so you’ll want to consult professionals as you create your succession plan. That said, here are some issues that you may need to consider.
Define your goals.
It sounds obvious, but you can’t plan if you don’t know what you’re planning for. Do you want your first son or eldest daughter to inherit the business? Will siblings share ownership? Do you want to sell it on the open market or to your key employees?
Write it down.
You might already have a vague semblance of a plan that lives in your head, but that won’t help your business or your loved ones if something happens to you. If you don’t have a written plan, you really don’t have a plan at all.
It’s a process, not an event.
Especially if your succession plan involves a change in ownership, you’ll want to allow several years at least for the transition to play out. Ideally, your formal exit plan is a long-term strategy that can be tweaked over time, so you might also want to create a short-term contingency plan to direct what happens if you get hit by a bus tomorrow.
Know your value.
Entrepreneurs tend to have an inflated idea of what their business is worth. Business Reference Guide and similar sources can give you an estimate based on your industry, and exit-planning consultants can help you maximize your value in preparation for a sale. A typical midmarket business often trades at about five times its EBITDA [earnings before deduction of interest, taxes, depreciation and amortization].
Sell or gift?
If you’ve decided that one or more members of your family’s next generation should take over the business, are you going to sell it or give it to them? Or have them inherit it when you die? The tax implications will vary based on which option you choose. For example, an inheritance worth more than $5.4 million is subject to the estate tax, but gifting pieces of the enterprise ahead of time can help the next generation avoid the hit.
Business owners sometimes create with other owners and the business itself an agreement that basically says, “When I die, my stock will be sold back to the company or the remaining owners.” Such agreements can be structured so that, for example, children who already have a stake in the business are in line to buy their parent’s stock, but siblings who have nothing to do with the business won’t inherit pieces of it under Louisiana’s forced heirship rules. Often, the purchase is financed by an insurance policy.
Be prepared to self-finance.
In the event of a sale, the owner often will need to finance at least part of the sales price. If the buyer is using a Small Business Administration loan, the SBA might require equal financing from the owner.
Family dynamics can be a minefield.
Family business succession is at least as much about the emotions and personalities involved as it is about the legal and financial details. Frequent, open and honest conversations with everyone affected by the business transfer are a must.
Bringing employees and customers into the planning loop may give them a greater sense of confidence that the business will survive and thrive after you’re gone.
‘Equal’ is not the same as ‘equitable.’
If you have four children, your instinct might be to divide company ownership equally among them. But that might not be fair to a daughter who has been working in the business for 15 years while her siblings scattered to other states. Perhaps the other kids should be left out of the business transfer but given more of other estate assets. Such an arrangement can create a feeling of equitable inheritance.
Owners, but not managers.
If family members who don’t work in the business are going to own a piece of it—which some experts advise against—you may want to set up some sort of governance mechanism for addressing family concerns that won’t interfere in the day-to-day business of the company.
Who should lead?
Don’t kid yourself about the next generation’s work ethic and ability, but give them the opportunity to show what they can do. Even after the official transition, it often makes sense for the company to retain the founder for a while as a consultant.
Use outside experts.
It’s generally good practice for family businesses to seek input from professionals who have industry expertise but don’t have a strong emotional connection to the company. Such experts also can help you craft a logical succession plan.
Make ’em earn it.
Members of future generations sometimes lack the drive and talent of the founder. Requiring relatives to show some professional or academic achievement before moving into an influential company position can serve to combat the entitlement disease.
Have a plan for what’s next.
In many cases, your company isn’t just your baby; it’s pretty much your life. Without some sort of plan for your next act, you could end up bored and miserable.