When transferring a family business, early planning pays off
Business owners understand that each day can present a new set of challenges to overcome and fires to extinguish. It’s easy for immediate concerns such as staffing, cash flow, purchasing, sales and other growth needs to take precedence over long-range thinking.
Consequently, business succession planning often gets placed on the back burner. Sometimes, this vital matter may be left until retirement age or, worse, forgotten altogether.
If you intend to pass on the family business to the next generation, procrastination should not be an option, says Larry Jones, a vice president and wealth advisor at the FirstMerit PrivateBank. Essential conversations should take place sooner rather than later, and these discussions may need to involve the entire family to ensure everyone is speaking in the same voice.
“By involving all necessary family members, everyone can be on the same page for these important early discussions,” Jones says. “Doing so can relieve the family of potential challenges down the road.”
For owners of a family business, forging a strategic plan early to provide for the transfer of the company in the event of death, illness or disability can have significant benefits, particularly in regard to minimizing tax consequences and making sure family members share common goals about the direction and financial future of the business.
Financial planning is important for any family, but it can be especially critical when it comes to a family business. Many times, a family may employ complex planning strategies, such as irrevocable trusts, family limited liability companies and valuation discounts, to facilitate the financial plan. Other considerations, including gifting of stock to the next generation over the founding business owner’s lifetime, can add further complications to the process.
To handle the unique succession needs of a family business, owners should work closely with a team of experienced advisors who can help guide the family through each phase of the process: initial planning, plan development and implementation. This team may include the business owner’s accountant, attorney and estate planner. At the team’s core should be a financial planner who, as a third-party facilitator, works to help resolve disputes and provide ongoing reviews to monitor the continued viability of the plan.
“Having a seasoned financial planner on hand to offer guidance can be a wise decision for the family,” Jones says.
“That person’s role is to provide ideas to accomplish the financial planning goals, keep everyone on task and keep the conversation moving in a businesslike and professional setting. These are important decisions, and they may not be easy, so they need to be completely thought through.”
Holding productive multigenerational meetings regarding business succession provides other benefits that can assist with a successful transition, such as clarifying expectations for those who will carry on the business, Jones says.
“Parents have a level of influence in setting expectations,” he says. “This is a great opportunity for the senior generation to share their vision. It can be a very positive process if everyone goes into it with the right attitude.”
Professionally executed succession planning can improve the chances that a business will continue to flourish and provide for the family well into the future.
“The family, more often than not, has worked a lifetime to nurture this business and grow it,” Jones says. “Proper planning can help ensure that the business will continue to be a valuable asset for generations to come.”