The Agony and the Ecstasy of Passing Down a Family Business

family business

The Agony and the Ecstasy of Passing Down a Family Business

After decades of fruitful ownership, passing down the family business is on your mind. You may be ready to spend your days traveling the world, or maybe you’re just tired of dealing with the day-to-day decisions required of managing a business. No matter if you are passing down a construction business, medical office, or a retail store, there are several considerations and steps you’ll need to take when passing down a family business. Perhaps most importantly, you’ll need to have the confidence in the next generation of family members to manage the process on their own. That’s very difficult even if that next generation has been working by your side for years.

Why Do Passed Down Companies Fail So Often?

It’s estimated that only a third of all family businesses passed to the next generation survive, and only 13% go on to be passed down to a third generation. Those shocking numbers may worry you, but the reasoning is simple.

Unless the person who will run your business next is just as passionate, motivated, and dedicated as you are, things will get bumpy. Succession planning for your family business needs to be a formal process, not just handing over the keys to your son one day.

Educate the Next Generation

If you know there will be a process of passing down your family business in the future, pull back for a moment and realize that the planning needs to start right now. In some cases, the family member who will be taking over will need to go to school to learn about business management, marketing, and human resources.

Even if he or she already has the actual skills involved in the day-to-day job, it’s important that they have a solid base of management education, preferably a degree in it. They are not opening a new business like you did, but taking over a profitable, already running company. There’s much more to learn in order to flourish at this stage.

From that point, the future owner also needs to work day-to-day in the business. Often, the second generation wants to step in and make changes. While some of these may be good, it’s important for that family member to realize that it’s more important to learn about the customers and employees, and manage the processes as they are. Ensuring that the next generation is capable of running your business isn’t always easy to do.

Determine the Best Financial Method for Transferring Ownership

The legal process of passing ownership from one person to the next is often a big decision in itself. Generally, there are three options. You can sell your business at market value to the next generation of your family. You can decide to use a trust, which may reduce some taxes while providing some level of control to you. You can also gift it. But which one is right for you?

In gifts, the company’s value is removed from your estate. You’ll have to pay gift taxes on your business if it exceeds $1 million in lifetime gift tax exemption. In addition, you will not get any proceeds from the sale. However, this is the best method for reducing taxation hits.

On the other hand, selling your business to your kids is a great option. In most cases, the new owner or owners will make payments from the profits of the business. That means you are not taking money from your children’s pockets.  In this situation, you’ll need to pay capital gains tax if your business has improved in value during your ownership.

It’s best to work closely with your tax planner and an attorney to determine the most effective method of transferring a family business based on its value and your needs.

Discuss Management and Control

Before making the move, sit down and talk to the family member who will be taking over your business. It’s important to learn what their expectations are of you, of the business, and about the future. For example, does your company have significant debt? What contracts are in place that may require renegotiating?

How much of a role will you, if any, have in the business going forward? The transition can be a difficult one if there is hidden information or a lack of communication between the two parties. For many people, it all comes down to communication throughout the process.

So should you pass on your business — the one you built from the ground up? It can be a good idea if you have put the time into helping the next generation to succeed. With careful planning and the right experts by your side, you can make the move a solid one. Keep in mind, though, you will need to ensure that the family member taking over for you has the same dedication that you do to seeing your business succeed.