Family-owned businesses account for more than 28 percent of U.S. firms, and they play a powerful role in the economy. From small businesses to large entities, there isn’t a one-size-fits-all approach for family-owned businesses and many have unique or complex arrangements when it comes to ownership, roles and responsibilities. However, one commonality that many family-owned businesses share is that they want their business to stay in the family for years to come.
According to a Wells Fargo/Gallup Small Business Index survey, almost half (40 percent) of small business owners said they were motivated to open their business to provide jobs for children or family members in the future, and another 34 percent say that when they retire, they plan to transition their business to a family member. Yet how many family-owned businesses have a succession plan in place?
As you think about the future of your business, it’s a good time to evaluate the status of your succession plan so that you can leave a legacy you’re proud of when it’s time to pass down the business. Here are four things to consider when preparing to develop or update a succession plan for your family-owned business:
Define family members’ roles – Identifying roles and responsibilities for family members who are active in the business will help you articulate how the transition will impact each stakeholder, and what type of support the successor can expect. If you’re hoping to hand the business down to a son or daughter, now is a good time to check in to understand if he or she wants to be involved in the business long-term, and in what capacity. It is also a good time to take a fresh look at your company’s staffing structure, analyze performance and assess who is most equipped to lead when you step down.
Explore financing options – As part of your succession plan, you will need to identify how to properly transition the business to the next owner from both financial and legal standpoints. Is your business a sole proprietorship or is it co-owned? Will your successor outright purchase the business, or will it be gifted to them? Does your business carry any debts? What are the tax implications? These are important questions to ask as you map out your departure from the business. Make sure you have a team of trusted professionals in place, including a banker, CPA and attorney, to help you answer these questions. Schedule time to meet with these professionals to learn more about how you can best fulfill your financial needs, and to design an agreement that’s fair for all family members involved in the business.
Set up a smooth transition – After you establish the financial and legal aspects of the succession plan, you’ll need to make sure your business is as organized as possible when you hand over the reins. One way you can do this is by creating an up-to-date, streamlined business plan. In a recent survey, only one in three small business owners reported they had a formal, written business plan.
Establish a timeframe – As you finalize your succession plan you’ll want to make sure you have a timeline that works for both you and the successor. Build any remaining training into the plan so you can be certain that you’re leaving the business in capable hands. As you communicate your succession plan to family and staff, make your exit strategy clear so everyone knows your role in the business following the transition.
There are many emotions involved in selling or handing down a family business, and a well-organized succession plan will help save you time and money. It also will give your successor the best chance of long-term financial success.
This week’s Tip of the Week was provided by Tawnie Nelson, director of small business for Wells Fargo in Oregon and SW Washington. She can be reached at 503-886-3313.