How should family businesses secure the best future for the companies they have built?
Most family business owners have heard the statistics. One-in-three businesses succeed to the second generation, only one-in-seven to the third. In most cases, the business is really treated like a member of the family, so it is surprising that the parents could let that happen.
Lack of planning for these transitions is the reason in nearly every case. There are only three directions the plan could take, but each one requires sophisticated advanced preparation. Businesses can be . . .
- Preserved for family ownership and management.
- Sold to partners or outside parties for family revenue.
- Liquidated for the family members to pursue other directions.
The success of these options depends on having everything in place-goals, agreements, people, and finances. These are not simple steps to begin with, but once the plan has been finalized and initiated, it must be regularly reviewed and updated to reflect changes in any of these circumstances over time.
Questions family business owners should ask to secure the company's future.
1. What different ownership/control scenarios would result from your retirement, disability, or death? What financial scenarios? What family scenarios?
2. What agreements are in place to assure the right scenarios occur? What valuation and funding assumptions support the agreements? How often are they reviewed?
3. What are your spouse's and children's feelings about your business at this stage of their lives? What is their involvement in the business today? In the future?
4. What potential conflicts of interest will be created by your succession plan if some children remain active in the business while others do not?
5. If you feel the right thing is to sell the business, how would your heirs find a buyer? If one could not be found or the price was too low, what is the fallback position?
6. If your business became one of the failure statistics above, would it be because . . .
- Liquidity needs for estate tax and estate equalization purposes forced a sale in an unfavorable environment.
- The revenue base was not sufficient for the needs of broader family ownership.
- Second generation fell into factions over financial and management issues.
- Family members, executives, or outside CEOs failed to fill your leadership role.
The decision process begins with the right questions.
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