4 Questions for Family Businesses
Family owned businesses operate day to day like any other company, but they do have special considerations to keep in mind. One of the biggest concerns I hear from family business clients is how to transition a successful company and keep it up and running after the owner retires or passes away. Succession planning is not always top of mind, and it can be difficult to focus on when dealing with the day-to-day aspects of running a business. Here are some factors to consider when planning for your family owned business’s future.
1. Do family members want to be involved in running the next phase of your business? And, if so, are they the best candidates? According to the Harvard Business Review, 70 percent of family owned businesses fail or are sold before the second generation can take over, and only 10 percent are still operating by the third generation. Even if it’s been in existence for generations, your son or daughter may have no desire to run the business. If they are interested, they may not yet have all the skills and expertise it will take. No business can survive unless it chooses the best person for each position, and sometimes that person is a non-family member.
2. How can you keep non-family members incented? If you hire outside the family unit, these professionals should be awarded the same respect, compensation and opportunities given to a relative in the same position. You don't want non-family members to feel like a raise or promotion is out of their reach because they aren't related to you. Even if they aren’t in line to own the business someday, you can keep them motivated by recognizing their achievements and entrusting them with key responsibilities. Also, if you do not desire to award ownership to non-family members, what financial benefits and incentives do you offer?
3. What happens if the business owner dies? In addition to being an emotional blow, the death of the business owner can have significant financial ramifications for the company and family. It’s important to have sufficient life insurance in place to help support the family. You also need to think about how operations would continue. Do you already have someone in place who could run the business in your absence? Again, this could be a family member or someone hired from outside. If you don’t, you should strive to find the right people who could take over so the business is not dependent on you.
4. How would you sell the company? When you’re ready to retire, you have several options for transitioning ownership to someone else. If the business will stay in the family, you need to think about what roles buy-sell agreements, gifting and trusts play. Perhaps an outright sale is best if you don’t have a viable successor. You could choose to sell to a competitor or other third party. Another option, employee stock ownership plans (ESOPs), are gaining favor and provide for certain tax savings. Departing owners of closely held companies can use an ESOP to create a ready market for their shares. The company can make tax-deductible cash contributions to the ESOP to buy out an owner’s shares, or it can have the ESOP borrow money to buy the shares.
If you haven’t already asked yourself these four questions, now is the time to do so. It takes five to 10 years to put together a good plan and have an exit strategy in place.
Mike Zorio can be reached at 865-602-5203 or by email at Mike.Zorio@pnfp.com.
