You're mistaken if you think that selling your business to a family member will be easier than selling to a stranger.
Family get-togethers are a much-loved part of holiday festivities. But gathering around the Yule log with loved ones can create special challenges for business owners--especially when the conversation gets around to the topic of when you will exit your family-owned business and whether you will pass the reins to a family member.
A family succession can be a logical and practical way for a company founder or owner to exit the business. Unfortunately, family members often have misguided perceptions about the process, timing and terms of a planned transition.
Tips for Planning a Family Succession
Many business owners enter the family succession process believing it will be easier than a traditional business sale. In reality, the transition of a family-owned business to the next generation takes more (not less) time and effort than selling your business to a total stranger.
To protect your exit goals and the integrity of your family relationships, it's important to clarify the family succession process as soon as possible. Although the details of your succession plan need to be tailored to your situation and your unique exit objectives, there are several tips and strategies that can help the process go a little more smoothly.
1. Be Transparent
Communication and transparency are key. If possible, sit down with your family long before you intend to exit your company to discuss your goals and to gauge family members' interest in taking over the business. By involving family members in every stage of the process, you can minimize the potential for family divisions and avoid creating hard feelings between siblings.
2. Clarify Ownership Shares
If you have multiple children, giving each sibling an equal share in the company can be a recipe for disaster. Sooner or later, competing visions or agendas will rise to the surface and threaten the company's future. To protect the business you worked hard to build think about transferring total or majority ownership to a single individual and identify alternate ways to compensate the remaining siblings. Alternatively, many owners separate the decision of equity ownership from which child or family member actually manages the business. While this can create challenges as well, it is another way to consider ownership scenarios.
3. Plan Ahead
The best family successions are preceded by years of planning. In addition to giving you time to craft a detailed succession strategy, advance planning allows you to prepare family members for their future roles in the company. It's not uncommon for business owners to encourage their children to work in other companies or industries so they can gain well-rounded business experience before they take a leadership role in the company. Additionally, many family-run businesses will rotate future leaders through key operational roles in the company to prepare them for the day that they are actually in charge. This process can also serve as a way to evaluate skills and performance, to determine what roles family members may be best suited to fill.
4. Consider Financial and Tax Ramifications
Family members expect favorable terms when they acquire a family-owned business. Although it's not unusual for owners to finance a larger-than-normal portion of the sale, you'll need to identify and articulate your financial objectives early in the process. If you intend to transfer part of the business as an inheritance or gift you should also consult a tax professional to determine the tax ramifications of your succession plan. Those family members who are going to take ownership of the business should have a clear understanding of how the transfer of equity and cash will impact their earning potential to ensure they are on-board and prepared for the economic reality of the transfer.
5. Stay Connected
If you dreamed about making a clean break from your business, you may be disappointed. In family successions the owner/seller usually continues to play a role in the company, at least during the transition period. But since the business is staying in the family, you will always be involved in the life of your company--even when you no longer participate in day-to-day operations.
Whether conversations occur over the holidays or not family business owners need to be prepared to discuss succession. Although it may require some uncomfortable conversations, communicating clearly and often will help you avoid any pitfalls, resulting in a successful transfer of your business to the next generation.