Begin planning early to save the family business

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Ready or not, someday every business owner exits their business. But it also is likely unexpected problems may ensue. Therefore, it is imperative to ensure there be a smooth transition, not only to save the family business, but to protect business owners should a premature death or disability occur while they are making that decision.

According to the Family Business Consulting Group, succession is the most painful and critical time for family businesses. Less than one-third of family businesses survive into the second generation, and only about 13% make it into the third generation. That’s a sobering statistic, and since family business is such an integral part of the U.S. economy, it’s essential to know why some family businesses succeed, and others fail.

During my 40-year career as an insurance adviser, I have seen plenty of change. One of my current clients is fourth generation, and I knew his great-grandfather. He is already planning what will become of his business when he exits. I also had a client that had no succession plan and simply liquidated his business when he retired, thus letting all the goodwill he had built with his customers evaporate overnight. Family-owned businesses need to think of succession as a process, not an event, while keeping in mind not everyone has until they are in their 70s or 80s to have it completed. Why? Because an accident or act of nature can take them out on their 30s and 40s. Without a plan, the value of the business will be decimated, and the financial security they were planning for their spouse and family is gone. Owners need to know the importance of life and disability protection while working through the planning process.

Business continuity is defined as a business’s ability to continue core business function operations that are not seriously impacted by a disaster or unplanned incident. Part of this includes exit planning. This is a process that involves planning how a business will go on after the owner’s retirement or death. The goal of an exit plan is to allow a business to survive without the founder’s direct involvement.

There are only four ways for a business owner to exit their business:

  • Transition to children
  • Sale to employees
  • Sale to a third party
  • Liquidate

Regardless of which option is chosen, planning while there still is time is critical. According to PricewaterhouseCoopers, 85% of business owners have not planned their exit strategy, and 65% had no idea what their business was worth, even though75% of their net worth was tied up in their business. The failure to plan for an owner’s transition may be the greatest threat to their family business. Nearly half (47.7%) of the reasons all family-operated businesses collapse is due to the founder’s death, or in 29.8% of the cases, the owner’s unexpected death. Only in relatively few instances (16.4%) did the business failure follow an orderly transition, and in situations where the owner was forced to retire, the figure drops to 6.1% (University of Connecticut Family Business Program, 2009).

Here are a few tips every family business should consider to accomplish a smooth transition to their children:

  • Educate next generations in regard to responsible financial management and wealth as early as possible.
  • Cultivate a family culture around shared values in your family’s history. 
  • Protect the business’s future ownership structure by instituting formal governance that will separate family control from the daily management of the company.
  • Professionalize the business by establishing employment standards for both family and non-family employees.
  • Begin planning now for the eventual succession of your business.

Perpetuating a family business can be the ultimate management challenge. If the family option isn’t chosen and the business is instead sold to employees or a third party, the business’s value is many times more because an unplanned transition often leads to a fire sale or forced liquidation.

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