There is now talk that Congress might enact automatic forgiveness for all PPP loans under $150K. This would relieve many small businesses (and their accountants!) everywhere. This decision enables owners to envision passing down what they’ve worked hard to achieve.
Let’s say we make it through this Covid and/or the world adjusts properly and you make “normal” business plans again. If we’ve learned anything from 2020, our best-laid plans don’t always turn out.
Exiting your business
Have a direction.
For many, it’s moving the business toward a sale. But others want to see their work passed onto subsequent generations, providing ongoing sources of supply and fulfillment for their children.
Passing Down Your Family Business
“You can always amend a big plan, but you can never expand a little one.” -Harry S. Truman
Only 34% of family businesses successfully pass to the second generation, and only 13% make it to the third generation. Those aren’t great numbers, considering many family business owners try to pass down their businesses to their children.
Successful people balance three different dynamics well: family, business and ownership — each have different goals and objectives and rules of behavior.
Business table topics are often uncomfortable when mentioned to family. The kind of intimacy present within a family structure doesn’t always lend itself to wise business decisions.
Look at these areas and see how they should be approached.
The Family Role
For most Douglas County family businesses, this is the most important dynamic to consider. The challenge is when it comes to succession. The older generation desires to pass on business and the ideals by which to operate it.
To do so, each generation has to be actively raised to the level of “peer” by the actions and attitudes of the generation before them. There are many ways to go about ensuring this happens. Still, I suggest that proven family character must be required for leadership in the family business. Some outside advisory board (whether formal or not) with at least two outsiders can help keep family values intact.
The Boundaries of Business
For a successful business, quick decisions and change are often needed. Businesses require long-term profit, not just family-centric needs. As a result, family members can’t be treated equally. If one family member works part-time while another chooses to work full-time, plus nights and weekends, the monetary incentive must be proportional to the profit each brings into the business.
If a business is passed from one member of the older generation to one of the next generations, many of these issues can be postponed or ignored. But if the business moves from a single owner to a partnership of siblings (and then to a set of cousins who are shareholders), the business must continue to run like a business — while simultaneously dealing with a possibly wicked brew of family tension. You need to plan for: leader selection, the role of non-employees, conflict resolution, and the shared control of different family branches.
Further, those running the business must also be trained in the financial responsibility of management, preferably before the change of ownership. There will need to be policies for fair dividend distribution for those not employed. Again, involving outside advisors, not just during the succession period, is a very good idea.
Who Owns It?
When a family business is divided into shares, there will be those working “in” the business and those who merely own shares. As a result, you need to make a predetermined plan for buyouts, professionalized management, mentoring, and family council meetings.
The ownership component is probably the easiest to transition and transfer, but it won’t achieve your succession goals without a solid family structure AND a healthy business structure.
Family businesses are complex, and there are many things to consider. But to do it right, you must ensure you are training family business leadership well, that business decisions are made for business reasons only, and that ownership transfers are made according to a good plan.
That’s the way you pass down a good family business.
Want to learn how to make the most of your family business by leveraging new tax deductions and exemptions? Give us a call, we’d love to help.