Inheriting the Family Business
By Tina Jones
Whether you are planning to retire, sell, or close your business in the future, you should have a written exit plan. Succession is a fact of life; it is better to prepare for it rather than ignore it. Because for many, the business is their most valuable asset. It only makes sense to have a plan. This is usually completed with the help of an attorney or financial advisor. The exit plan outlines your business and a contingency plan to execute in the event of illness, divorce, and death.
It is important to plan for the transition as many businesses do not survive the transition from one generation to the next. Family businesses are advised to follow a process in planning for succession.
- Initiation Stage – Successors are introduced to the business and guided through a variety of work experiences.
- Selection Stage – A successor is chosen, and a schedule is developed for the transition.
- Education Stage – The business owner gradually hands over the reigns as the successor learns the required skills for running the business.
- Transition Phase – The business changes hands.
Estate planning for the inheritance of a business is not for the faint of heart. The financial and tax aspects transferring ownership can be a burden. Heirs can be taxed at a high rate when the ownership is transferred. Hiring an estate planner is highly recommended due to the complexity of estate and tax laws.
Family Exit Plan is a plan you create if you are leaving your business to more than one heir. If one family member wants to leave the company, the value of their share has been predetermined. This will keep the heirs from having to sell the company to have to pay the heir that wants to sell.
If you are the one that is inheriting the family company or business, here are several steps you would want to take. Gather all the information that you can on the current state of the company. You will want to know about the corporate paperwork, business licenses, and account information including accounts receivable and payable. It would be ideal to have a current balance sheet, profit and loss statement, and cash flow statement. Treat it as a due diligence period. Know what you are getting into. If you are lucky enough to have a succession plan and business plan from the previous owner, this will provide guidance in training, confidential information, and insight on your customers and competitors.
The rewards of inheriting the family business far outweighs the challenges. Being prepared to carry on the tradition of business ownership can be achieved through communication and planning. It is never too early to begin the process.