Most business owners want to grow their businesses and maybe even pass them on to the next generation. But how many owners actually succeed? Relatively few, as it turns out. Studies show that only a third of family firms make it to the second generation, and just a sliver get passed on to the third generation.1 A key reason for this is that many companies lack proper succession plans.
Consider the situation your family, employees, and company would be in if something unexpected were to happen to you. What would happen to your business? Would it stay in the family? Could it realistically stay solvent without you at the helm? Or would it be sold? And then there’s the million-dollar question: Do you even know what your business is worth? The answers to these questions may not be as straightforward as you imagined.
That’s why you should start planning now even if you plan to stay with the business for years to come. So, what options are available? If and when you exit your business, there are four possible successors: family members, co-owners, key employees, or an outside third party.
That brings us to a succession action plan and exactly what that entails. First, select your successor(s); this may require careful analysis. Next, determine your business valuation. Bear in mind that when a business is sold to family members the transaction draws extra scrutiny from the IRS.
Finally, develop a plan to transfer your business interest quickly to minimize operational disruptions.
Once you identify your successor(s), you must make sure that the individual(s) is in a position to take over the company—and you must ensure a smooth transition by outlining the terms of succession in advance. A buy-sell agreement will work differently, depending on the type of business entity and the number of owners.
[1]Each type of agreement helps create a smooth process for transferring ownership of the business. The buyer can purchase a life insurance policy to help make sure there are available funds to purchase the business when the time comes.
Additionally, a buy-sell agreement helps show creditors and customers that your business is sustainable because you are taking action to mitigate risk. Each business is unique, of course, but succession planning is something that all businesses should consider.
1 Vincent Molly, Eddy Laveren, and Marc Deloof, “Family Business Succession and Its Impact on Financial Structure and Performance,” Family Business Review, September 29, 2017. https://journals.sagepub.com/doi/10.1177/089448651002300203
To learn more about the information or topics discussed, please contact Sharinna Sarmiento at 240.367.0719 and ssarmiento@ft.newyorklife.com. Neither New York Life nor its Agents offers personal tax or legal advice. Please refer to your legal or tax advisor to find out if the general ideas in this material apply to your personal circumstances.
Frederick Chamber Insights is a news outlet of the Frederick County Chamber of Commerce. For more information about membership, programs and initiatives, please visit our website.