4Thought Blog

Often, the senior generation of a family business goes through the process of choosing one of its offspring as the successor to lead the company in the future. Usually, the chosen successor is given the title of president or CEO.

For a period of time, he or she will work under the supervision of the senior family member, who may have founded the business. Eventually, the successor takes over complete operating control of the business.

This means that the fate of the future operation of the business is in the chosen sibling's hands and, naturally, he or she will be compensated accordingly. But what about the other siblings who weren't chosen?

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:

If you own a business, you're probably familiar with the protections provided by buy-sell agreements. But do you know how important these documents can be to an estate plan?

Because buy-sell agreements specify whether, and under what circumstances, owners' interests may be transferred, they can help you control the ultimate disposition of your business and achieve other important estate and succession planning goals.

If you're a business owner and a high-net-worth individual, you may want to gather your family members together to discuss the details of your estate plan.

This can be especially important if you own a business that employs family members. These meetings are a little like the Scottish clan gatherings held hundreds of years ago by clan chiefs to discuss their succession and inheritance plans.

If you're a business owner, do you have a plan in place that names who'll follow you as head of your company? You may feel you're too busy running the business today to waste time on long-term plans that seem so distant.

But there may be more reasons than you think to make decisions, some of which will benefit you today. A well-thought-out plan will:

Long ago, in some countries, kingdoms used to be passed to the oldest child — and often, the oldest male. While this may have had advantages in ancient monarchies, it has no place in family businesses.

In the case of family-owned businesses, it is still sometimes the practice to install the oldest child, and the oldest son, as the successor CEO.

Experience shows that this often leads to inefficiencies and mistakes that jeopardize the continued existence of these family businesses. An old saying, "shirtsleeves to shirtsleeves in three generations," describes the fact that many family businesses that are passed down to children and then grandchildren tend not to survive through the third generation.

Most businesses that go to market don’t sell, largely because they’re not attractive enough.

How can you get top dollar for your business? We use the tested and trusted Value Builder System to help business owners discover steps to improve their business value. Improving your Value Builder Score may more than double your pre-tax sale price.

A business owner's net worth and future income depends on the value of your business, whether you plan to sell it or pass it along to the next generation.

As you look towards your future, succession planning is the key to growing and getting the most out of your business.

In today's environment, it's important for business owners to focus on the value of their company and what drives it. The objective of this article is to look at value drivers for operating businesses, as opposed to businesses that are asset-based, such as real estate or securities holding companies.

Under the market and income approaches, operating businesses are valued based on how much cash flow they're expected to generate in the future. In other words, cash flow drives value.

If you want to increase value, you need to increase sustainable cash flow.  Notice, we said the sustainable cash flow. While it might look good to have a short-term increase, an educated buyer will see through any non-sustainable increases and adjust those in determining the purchase price.

While preparing your succession or estate plan, it can be helpful to value your family business both internally and externally.

You might wonder what that means — because you think your company has just one value. In fact, it can have multiple values depending on the valuation standard used. The different results can help you determine whether to keep the family business, pass it on to the next generation or sell it to an outsider.

Two common standards used in valuing a family business are: