Passing your family business from generation to generation can be a difficult task, however a rewarding one. Your business can be a pivotal part of your legacy and offer your children a means to make a living as well as maintain close family ties. Forbes offers six steps to aid in making your family business a family legacy in the below excerpt from a story of a dry-cleaning family business:
1. Give the family a reason to continue the family business: I don’t know the reason the daughters didn’t want to continue Dad’s dry-cleaning business, but I do know that their lack of interest doomed that family business. An owner needs to motivate the family to participate. Is there enough profit potential to attract and retain family members? Are the successors sufficiently comfortable about running the business in the owner’s absence? Have they been given the freedom to feel like they are a part of the business’s success — not merely employees of the owner’s personal empire? If the business is to stay in the family, it’s important to move from an iron fist to a velvet glove management approach.
2. Develop a management team: Sometimes what the owner perceives is a family legacy is really just a personal legacy. The value of the business is merely blue sky that vanishes when the owner is gone. I’ve seen this happen with firms where the senior generation is the rainmaker and the kids are the doers. Family members were never developed as senior management, so even if they want to continue the business, they’re not qualified to run it. Furthermore, a family legacy sometimes needs help from those that don’t carry the family name. If you have key employees who will never join in owning the family business, what steps have you taken to assure their continued loyalty if you leave? Have you set up a stay bonus; do you have a golden handcuff plan to retain them?
3. Structure a business succession plan: Even in a family business, there is a compelling reason to have a legally binding succession plan. I recently had someone tell me, “The buy-sell was never executed, but the son is ok with the plan.” My response was simply, “Yes, but is his wife ‘ok’ as well?” Stated differently, family members deserve to have a known and agreed upon plan. Anything less is both unfair to the family and a recipe for family discord. There are numerous structures that allow the owner to maintain control, be guaranteed flexibility and yet lock in a succession plan. Concepts like “wait-and-see buy-sell” and “no-sell buy-sell” offer ways to create a succession plan without sacrificing control and adaptability.
4. Fund the business succession plan: During the Great Recession, I saw too many businesses fail, not because they were unsuccessful as businesses, but because of a lack of emergency funds. One of the owners died, became disabled, was divorced or had personal credit problems. And the family business paid the price. They had to liquidate, sell the business, or bring in non-family partners. Life insurance, disability insurance, sinking funds…all are important ways to assure liquidity for ongoing operations.
5. Wealth replacement for other family members: There is more to a family than the family business. Owners need to be sure that those family members who are not involved in the business are still taken care of. For example, a non-involved spouse will want ongoing income if the owner-spouse dies. If some of the children are involved with the business and some are not, it simply will not work to divide stock equally among the siblings. To avoid family conflicts and a subsequent business failure, some kind of inheritance equalization plan is needed.
6. Have a successful business: Targeting success may sound obvious, but this is not a given with a family-owned business. Sometimes the family business makes enough that the owner pulls down excessive compensation, or non-working family members are placed on the payroll. These tactics may temporarily provide family peace, but they can tear a business down. If a family business is to become a family legacy, the business must be able to stand on its own. The owner should make the tough calls now, so that the transition can be smooth in the future.
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Integrity Financial Corporation offers a holistic approach to legacy planning and wealth management that is unique and unparallel. Integrity Financial Corporation is a boutique firm driven by understanding client needs and creating genuine, lasting, relationships between advisors and clients. We aid in the process of leaving a legacy comprised of both tangible assets, but also intangible values and memories. We strive to work with families for an effective transfer of wealth from generation to generation to aid in the longevity of wealth across countless generations as well as the longevity of family business if applicable. The holistic approach caters to the family and the importance of communication and education, as well as a shared family vision.
At Integrity Financial Corporation, our clients can expect to receive personalized service and expertise, built on a foundation of trust. To contact an advisor and discuss planning your financial legacy, please call us at 1.800.794.4015 or visit our website at www.ifclegacy.com.