6 Things to Do Before Passing Along the Family Business
A family business offers so much more than household income. What often begins as a dream for one or two people can grow to form a large part of the identity, fond memories, and future hopes of an entire family. If you’ve got a family business and are beginning to think about what will happen when you’re ready to pass that business along to a family member or someone else in five, ten or fifteen years, there are several important things to address to ensure you walk away with the outcome you desire.
First, determine your goals.
Set aside time to sit down and specifically define your goals for the succession of your business. Some questions to ask yourself are: Do you feel you have enough retirement income or do you need the succession of your business to help fund or add to your retirement funds? Is it important to you that your business outlives you and passes along to your heirs, or is your plan to close or sell the business to someone else and minimize taxes in the process? How would you like to use your financial capital to invest in your family capital? Is there a charitable gift you’d like to make or other way you’d like to make a mark on the world? Take some time to prioritize these objectives so you can begin to act and plan accordingly.
Next, talk with your family.
When it comes to transitioning a family business, it’s easy to think about giving each family member the exact same treatment, but that may not make sense for your business. Family members either may not be qualified to take a role in the business or they may not want to be involved. Unfortunately, as you can imagine (and may have experienced), arguments and resentfulness can arise regardless of the situation.
Often, the best way to minimize future family strife—and optimize the outcome—is to communicate with each family member well ahead of time. Find out what they’re interested in and what they’re hoping for. Be aware that avoiding these discussions can take a toll, both in terms of family conflict and even in legal struggles. If you don’t feel comfortable having these talks on your own, find a professional who is trained in successfully mediating family meetings.
If you decide that your kids (or even key employees) should have an increasingly important role in the future of your business, look to leverage their strengths. Look at what your children excel at and think about how to utilize their unique strengths to form a team that you can mentor into success.
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Maximize your business’s value.
If you’re selling your business, the previous step is moot. That said, regardless of whether you’re training someone to take over or selling, there are some steps you can take to maximize enterprise value in the transition. Introduce your successor to your employees, clients, vendors, and strategic partners; let those folks know that their opinion is important by asking them what your successor needs to know to be successful. Let your successor prove their worth; rather than giving kids a free pass to the corner office, it is valuable for them to do some of the grunt work with pride. This will enable your children to understand the value of hard work—and realize the ultimate payoff. And lastly, have a plan for passing the reins – most transitions happen either far too quickly or far too slowly, which brings us to the next step.
Pass the reins at the right pace, as well as at the right time.
When thinking about turning over power (e.g., decision-making authority), the tendency is to be slow in letting go. This happens both because it feels good to be needed and to have authority and, at the same time, because the business owner doesn’t want to see his or her successor stumble through mistakes that could have been avoided. But a transition that moves too slowly frustrates and demotivates successors, while one that moves too quickly yields unnecessary mistakes and pain for employees and clients.
As you transition your business over to your successor, keep the following in mind to help you do so at the right pace: What is the next impactful thing your successor can take ownership of? For a particular task, is the cost of a mistake higher than the lesson learned and the autonomy experienced? What could your successor do to prove to you that he or she is ready for a certain responsibility? What aspects of the business is your successor most passionate about learning and owning?
Engage key employees in the process.
Be sure to bring key employees into discussions. If they aren’t your choice for successor, they will still be playing an integral role in ensuring that your business doesn’t skip a beat. If they feel like they have a voice in the decisions that are made around the transition, they will be much more willing to help. As you did with your successor, look at their strengths and interests and allow them to guide some of your decisions.
Work with a trusted financial advisor for a smooth transition, every step of the way.
If you’re not already working with a financial advisor, it’s a very good idea to begin working with one throughout this process, and to help you facilitate the mechanics of making the actual transition. He or she will help to facilitate each step of the process so that you can pass your business on to your successor smoothly and enter the next chapter in your own life exactly where you want to be.
At Weiss, Hale & Zahansky Strategic Wealth Advisors, we partner with business owners to help them work toward financial goals for both their life and business – all the way from growth strategy to exit strategy. See how our strategic Plan Well, Invest Well, Live Well process can help you put plans in place to achieve a successful business transition >
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Presented by Principal/Managing Partner, James Zahansky, AWMA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.
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