Many successful companies are family owned and run. And there's a good reason for it. It takes passion to run a profitable business -- especially a smaller one.
A family-owned company can benefit from the special dedication of a founder at the helm and possibly a spouse, siblings and children working alongside. But the devotion and dedication to the business also needs to apply to the company's succession plan.
Once you've worked to build a business, it's important to make sure your legacy is protected. A swift and seamless transition in ownership is one of the things to consider well before you choose to step down. But there's a critical question to ask yourself: Will family members be prepared to take the lead on the ownership team?
Here are some considerations when structuring a good succession plan for your family-owned business:
Recognize the Financial Value: A succession plan isn't just a strategic plan. It's also a wise investment. Without a skilled ownership team in place, a company can easily falter -- especially in difficult or uncertain economic times. When you're committed to getting family members to assume top leadership roles, understand that they can be a vital part in ensuring your business continues on for the long-term. If they're interested in seeing the company grow and last the test of time, that commitment is half of the battle.
Remember that many founders of family-owned businesses continue to retain an investment in the company, even after relinquishing the top spot. So, it pays to protect your investment and the investment for the rest of the family. Look to the most committed and qualified family members to lead your business and you'll be well positioned to make that happen.
READ MORE: Family Business: 7 Tips for Selecting a Successor
Be Decisive: Make sure you're clear about the next step you'll take. You might consider gifting the company to your family or leaving the business to them as part of your estate.
Will you be setting up a trust? If so, what type? There are many ways to exit a company and pass it on to family. The direction you take depends on the commitment of family members to the business, as well as your intentions as the owner.
Are you looking to sell your interest to your family flat out or over time? Or would you sell the company to outsiders and keep the family in management? Outside investors will likely bring in their own management team, which can lead to family members feeling pushed out. If family members feel that they aren't invested in the business, financially and directly, there can certainly be discontent. It makes sense to give family members who are active in the business a chance at a stake in it, if possible.
If you're wondering about compensation for the various family members working at the company, make sure to link it to the involvement in the business, rather than the family relationship.
Get Buy-In: If you're determined to keep the business in the hands and control of your family, you need to groom the next set of leaders well in advance of stepping down from the company.
Obviously, there's a big difference between having family members work alongside you -- and getting them prepared to make difficult decisions as an owner of the business. Make sure you understand the commitment and skills of the family member looking to take over the leadership role. They need to be open to the grooming process and you need to commit to taking the time to make it work.
Don't hire your siblings or children just because they're family. Sometimes it's wise to look outside of the family circle for a qualified leader to add to the team.
READ MORE: Business Succession Best Practices – Family Transfer or Third Party Sale (Video)
Minimize the Tax Burden: This is one area where a knowledgeable CPA, along with a qualified attorney (or two), is needed. If you're looking to gift or sell your interest in the family business to a spouse, siblings or children, you need to understand the tax implications to you and your family. There are financial vehicles that can help to minimize the hit from gift and inheritance taxes.
But when it comes to your financial investment, there are many ways to structure your exit from the company. Assemble a solid team of advisors and you'll stand a much better chance of preserving both your business and financial legacy.
© 2021
