Recent statistics on business generational transfers follow a 30-13-3 rule – 30% of family owned companies are successfully transferred to the second generation, 13% to the third and only 3% to the fourth. If success and longevity go hand-in-hand, these numbers may seem disconcerting.
Keeping your company in the family is an exciting option when it comes to selling a business. However, selling the company to a family member doesn’t make the transaction any less bureaucratic or, in some cases, complicated. In fact, the prep work for a business generational transfer far exceeds that of a third-party acquisition.
Plan Your Generational Transfer
If you want the family business to have continued growth and success throughout generations, grooming your future successor(s) is key. Don’t ever assume that one of your children, nieces or nephews will naturally have all of the talents, characteristics and financing needed to pick up the baton when the time to transfer ownership comes. Grooming a future leader is a life-long endeavor, but for now let’s fast forward to several years prior to when you would like to exit the company.
A generational transfer should begin somewhere in the range of 5-10 years before the actual business sale takes place. Here is a snapshot of what needs to be completed over this timeframe:
- Assess the current status of the company and potential successors.
- Come up with a plan B (and C).
- Start the paperwork and make sure all agreements are up-to-date.
- Execute the transition/transaction over a set time period.
Additionally, lawyers recommend having the following agreements in place:
- Family business agreement – whether you use a general partnership agreement or something else, having a family business agreement in place serves as a guide and provides legal protection to all family members involved in the company.
- Buy-sell agreement – this agreement is two-fold; it helps determine the value of the family business as well as outlines what will happen to keep the business going in the event of an unexpected death or disability in the family.
- Prenuptial agreement – in this case, your prenup should outline what happens to the business in the event of a divorce especially when the family business was inherited, started before marriage or you are entering into a second marriage where children from a previous marriage are involved.
When to Divide and Conquer
Maybe you are reading through this article with one perfect family member in mind, or may you aren’t confident there is a single person in the next generation who will be able to rise to the challenge of owning and running a business. Regardless of which side you currently find yourself on, you’d be remiss if you didn’t consider the possibility of co-ownership. Selling the family business to both sons was the perfect solution for one of our former clients.
Our client transferred his business to his two sons who had very different strengths. One son was finance-minded and the other excelled in sales and marketing. While the father chose to sell his business to both sons out of fairness, he often sided with the finance-focused son being similarly minded himself. However, it was the son who was passionate about sales and marketing who ended up having the skill set needed to take the company to the next level.
The take away of this short story is that it takes a lot to run a company, but even more to grow it. Each of your family members has their own unique set of skills – none of which will be identical to the original entrepreneur – and it might take more than one skill set to successfully run the family business.
If co-ownership seems like an option for your business generational transfer, start thinking about how you can help these different family members figure out that they need each other and how each can carve out their own niche in the business.
No Plan At All Is A Plan To Fail
While no family, company nor business sale transaction are exactly the same each of them can suffer from a lack of responsibility. If you’re reading this article thinking there is no way passing the family business on to your child will be this convoluted, this next part is for you.
In one business generational transfer that Links Financial eventually got involved in, the original owner didn’t make any preparations for selling the family business to his kids because he assumed that his son would take over and that his wife would be handling the transaction after he passed. When neither of those things panned out, it was a scramble to say the least.
The business owner’s wife passed away unexpectedly and his son had interests elsewhere and moved away. Left with no plan and no time, the owner split the company between his daughter, who he never groomed to take over the family business, and two of his executives. When the economy tanked a few years later, the new owners weren’t prepared to manage the situation properly and, in the end, the company was separated and sold for its assets.
The moral of the story is that you must plan for a business generational transfer and address potential issues in order to maintain a successful family business.
Keep Your Eye On The Prize
The reality is that a business generational transfer requires multiple people and multiple steps over a number of years. In addition to proper preparation, a non-biased point of view will help expedite the transfer and keep the focus on what is best for the business. There are times that a third-party acquisition makes sense and is the more successful option for both the company and the family members. Then there are other times when choosing the best successor requires overcoming family dynamics. Partnering with Links Financial will help take the emotion out of your generational transfer and keep the focus where it should be. Contact our firm today and learn how we can help you through each step of the sale of your business.