In a recent study, an alarming statistic was given: only about a third of all family businesses successfully make the transition to the second generation and only 12% of businesses are still viable into the third generation.
So much time, money and effort goes into building a successful family business, you should ensure proper planning is in place so your business will continue to thrive even after you are no longer able to run it.
If no plan is in place, the business will be passed down to the successors of the estate, acquired by other shareholders, or a combination of the two.
In a family-owned business, this may cause an uproar between siblings and other relatives or between those more active in the day-to-day operations and those who are less involved but received an equal or greater share.
If employees and clients of a larger corporation catch wind of the arguing, they may threaten to leave the company for fear of instability. If an ill-equipped person is tasked with being involved in meetings between shareholders, if they do not agree with business proceedings, they can delay production which could potentially lead to loss of business.
With a plan, the business will pass according to your wishes. Typically succession planning involves either retention or buy-sell retention, although it can be tailored to best comply with your wishes.
Retention Planning involves keeping the business or shares within the family. With a retention plan, a spouse, children, or other relatives will retain control of assets.
Buy-Sell Retention Planning involves giving current shareholders or vital employees an opportunity to take a larger stake in the company. A fair valuation of shares will be determined and agreed upon by the business owner, then offered to the shareholders.
Don’t leave your business without a future. By planning ahead, you can determine procedures to follow and appoint a competent successor who will carry out your goals for your business into the future.