Thinking of transferring a Family Business to Your Children?
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If you own a household company, you have actually likely spent your lifetime growing and supporting the business. You have certainly provided significant thought to the future of your service, including what will happen to it upon your death. If you are like most family company owners, your initial idea is to pass the business on to your loved ones.
However, is this a wise choice?
Studies reveal that only about one-third of all family-owned companies continue to achieve success when handed down to the next generation. Moreover, less than fifteen percent succeed by reaching the 3rd generation. The reasons for this are varied; however, some typical concerns necessitate your consideration.
Typically, the owner of a family-owned small business assumes that his children are interested in continuing to handle and run the business. To avoid making this error, ensure that you take a seat and speak to your children to be certain that they are interested in the business. If your kids are interested, ask yourself if they can run the business. This is often difficult to do objectively. It is, however, needed. Handing down a household service to children ill-ready to run a business is a dish for catastrophe. By the same token, scheduling the sale of a business, and passing down the profits to kids, can likewise be a bad concept if the beneficiaries are not prepared to handle such a gift.
As you can see, deciding what to do with your family-owned organization in the event of your death is not a basic matter. Along with making some frequently difficult personal decisions, a variety of estate planning choices will need to be made based on how you eventually choose to manage your service. The worst thing you can do, however, is not doing anything. Without cautious estate planning, the fate of your business runs out of your hands.
Worse, if your beneficiaries are not prepared to manage the earnings from the sale of a business, the proceeds will likely be wasted in a brief period. Take the time now to make the decisions that need to be made and incorporate those decisions into your estate plan.
Considerations for Parents
When it comes to family business succession, there are no easy answers. Transferring the ownership of a business you and your family have built over many years requires careful planning and support from all stakeholders. Here are some things to consider when transferring a family business to your children.
Assess Objectives and Goals
Before jumping into the process of transferring your family business, take time to evaluate why you are doing this. What goals do you have in mind? Do you want your children to expand, maintain or completely transform your company? Setting clear objectives is essential for successful succession planning.
Identify and Evaluate Your Children’s Skills
No two children are the same – each will possess different strengths, weaknesses, and personalities. To ensure that ownership of your company ends up in the right hands, it’s important to assess the skills and experiences of each potential successor. You may need to provide additional training or education to round out a child’s portfolio of skills needed for successful business ownership.
Develop an Estate Plan
Apart from considerations regarding business ownership, you should also consider estate planning – such as how to protect the value of assets in the event of death or divorce. Sound estate planning ensures that both business and non-business assets are accounted for and adequately protected for future generations.
Outline Financial Expectations
If you plan to transfer ownership of your family business, you should develop a financial plan that outlines expectations and payment plans. This can help avoid future misunderstandings between you, your children, and other stakeholders.
Create a Support System
This final tip is vital to long-term success: establish a system of support for your children as they transition into their roles as owners. Connect them with mentors who can offer advice and guidance or help them find investors if they need additional capital. It’s important to have backups available in case they need assistance.
Transitioning a family business to your children is no small feat. But by assessing their skills and creating a well-thought-out plan, you can help ensure its continued success for many more years to come.