Dear David: Transitioning the business to your kids

January 16, 2017

January 16/23, 2017: Volume 31, Number 16
By David Romano

Dear David:

I am now 63 years old, have owned my business for over 30 years, have two sons who grew up and are working in the business. I am ready to walk away but don’t know where to get started. Can you please help me?

Dear Worried Owner,

Screen Shot 2016-08-29 at 3.15.31 PMOnly about 30% of family businesses survive into the second generation, 12% are still viable into the third generation and only about 3% of all family businesses operate into the fourth generation or beyond. Research completed by the Family Business Institute indicates family business failures can essentially be traced to one factor: a lack of family business succession planning.

Following are pointers on how to prepare for your exit:

Determine your income requirements. Figure out what is required to provide the standard of living to which you are accustomed. Build a detailed personal budget—once a deal is struck you are most likely stuck.

Choose your future role. From a leadership perspective, the business founder must be prepared to relinquish the helm without reluctance or regret. A strong message must be sent to the next generation, employees and customers that this decision was made without duress or shame. The outgoing founder may or may not want to have a continuing role in the business in an advisory capacity.

Pick the date. A successful transition plan usually involves a fixed departure date with a strong system to support the new generation of leadership. Be sure to resist the temptation to interfere, and have an alternative exit strategy if the new leadership fails.

Get a professional valuation. Estate and succession decisions involve complex questions of law, tax and business planning, including the types of property, the form of ownership and, for small business owners, the organization and operation of the business and steps for passing that business to the next generation or potential buyers. Work closely with your lawyer and other specialists to find the best plan.

Identify the next generation or potential buyer. Be honest with yourself when analyzing the strengths and weaknesses of family members. If your family members don’t cut it, look at long-term, productive employees or competitors looking to increase share.

Build a detailed transition plan. Firms that focus on the family-owned sector can provide assistance with this task. When building this transition plan, milestones must be determined, timeframes established and required resources outlined.

Prepare the successor. Invest the time and money to train and educate the next generation of leadership. If your succession plan calls for a full or partial sale of your business to some or all of your staff, do the same for the employees who will take over. If you are selling to an outside investor it may be necessary to wear the golden handcuffs until the new regime is fully prepared.

Create a self-reliant business. The book value of a retail business lies in tangible assets, customer base, market share, revenue and expenses, and the potential for future earnings. However, there is no sustainable worth if the only way for the business to retain that wealth is through the daily management of the founder. Companies are much more attractive and sustainable through a transition when built on extraordinary systems that can be run by ordinary people.

 

 

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