The Life and Death Reality of Business Succession Planning

Did you know?

Without succession planning, nearly seven out of ten family-owned businesses won’t survive into the second generation.

The entrepreneurial spirit is fueled by innovative, hard-working individuals that want to forge their own path. It’s this spirit that has supported the backbone of the American economy for years, with more than 90 percent of U.S. companies being family-owned or controlled, according to the U.S. Bureau of the Census. When you consider that family-owned businesses employ 62 percent of the country’s workforce (according to the Conway Center for Family Business), it can be worrisome that only about 30 percent of these businesses will survive into the second generation.

While these statistics may be surprising to first-generation family businesses, there’s plenty of time to identify the right succession plan to keep your business, and legacy, going from one generation to the next.

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The biggest challenge to succession planning is finding the time to devise an approach that’s right for you. The day-to-day demands of managing a business and a family, combined with payroll, employees and hundreds of other operational tasks leave little extra time to plan for the future.

Once you’ve decided to start planning, you’ll need to do some research. The following provides a quick start guide to kicking off your succession planning in a way that will help preserve the business and your family:

• Identify a team. When the decision is made that a succession plan is needed, don’t go it alone. Bring together your team of advisors: your lawyer, accountant and financial advisor, to ensure you’re thinking about the right aspects when approaching a plan and are aware of any tax implications this may bring.
• Know the value. While there are a number of ways to determine the value of your business, from EBITDA multiples (earnings before interest, taxes, depreciation and amortization) to revenue multiples and appraising assets, it’s important to have both sides agree on the criteria for the valuation process.
• Don’t forget taxes. Establishing grantor retained annuity trusts (GRAT), limited family partnerships, and even irrevocable life insurance trusts are all approaches that might be worth considering when understanding the full financial impact of selling your business, and the resulting proceeds. Each approach will not work the same for everyone, but connecting with someone who is aware of the tax laws as well as your financial situation will help to protect against any surprises.
• Plan to negotiate. Unlike buying a new car or home from a third party, the family dynamic of business succession can drastically change the negotiation process. Having empathy for both sides, such as children understanding their parents’ retirement goals and parents not wanting to overburden their children with too much debt, can help keep the negotiation process amicable and productive.
• Have an agenda. Negotiations often get complicated quickly, so setting a clear agenda that both sides agree to follow can help keep everyone focused on mutual goals and ensure that the business stays in the family.
• How does the deal stack up to a third-party sale? Understanding what the sale of the business to a third party might look like helps keep everyone honest and provides an additional perspective.
• Finalize the deal and begin the succession. Once a transaction is closed, it’s best to let your successor take control. It can be difficult for the former owner to relinquish control, so agreeing to a clear and brief transition period can be very important.

Remember that planning for succession can be complicated and having a step-by-step plan can help to manage all the moving parts. Keep in mind that as the process moves forward – and the demands of the transactions escalate, you don’t have to do it alone.

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