Planning for Generational Wealth: Top Tips You Need to Know
If you have a business you plan to pass on to your children or other family members, there are key questions to keep in mind.
HOW CAN I ENSURE THAT MY SMALL BUSINESS WILL SURVIVE THE TRANSITION INTO THE NEXT GENERATION?
Less than one-third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership. At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few.
The following is a list of options to consider:
Close the doors
Sell to an outsider or employee
Retain ownership but hire outside management
Retain family ownership and management control
There are four basic reasons why family firms fail to transfer the business successfully:
Lack of viability of the business
Lack of planning
Little desire on the owner’s part to transfer the firm
Reluctance of offspring to join the firm
The primary cause for failure is the lack of planning. With the right succession plans in place, the business, in most cases, will remain healthy.
WHAT’S INVOLVED IN SUCCESSION PLANNING FOR A FAMILY BUSINESS?
Transferring the family business requires the family to make a determined effort to do the following:
Create a business strategic plan
Create a family strategic plan
Prepare an Estate Plan
Prepare a Succession Plan, including arranging for successor training and setting a retirement date
These are the four plans that make up the transition process. By implementing them, you will virtually ensure the successful transfer of your business within the family hierarchy.
Q: What is a business strategic plan?
A: A business strategic plan defines goals, objectives, and targets for a company and outlines its resources will be allocated in order to achieve them. When a strategic business plan is in place, it allows each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company’s future. A strategic plan is long-term in nature and focuses on where you want the business to be at some future date.
Q: What is a family strategic plan?
A: The family strategic plan establishes policies for the family’s role in the business and is needed to maintain a healthy, viable business. For example, it should include the creed or mission statement that spells out your family’s values and basic policies for the business, and it may include an entry and exit policy that outlines the criteria for working in the business. The plan should consider which family members desire to have a part in management of the business versus those who desire a more passive role.
Q: What is an estate plan?
A: An estate plan is a written document that outlines the disposal of one’s estate and includes such things as a will, trust, power of attorney, and a living will. An estate plan is critical for the family and the business because, without it, you will pay higher estate taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax effective manner.
Q: What is a succession plan?
A: A succession plan identifies key individuals who will be groomed to take over the business when the time comes. It also outlines how succession will occur and how to know when the successor is ready. Having a succession plan in place goes a long way toward easing the founding or current generation’s concerns about transferring the firm.
If you need any advice or help with future business planning, reach out and book a discovery call to learn more about our financial services.