Financial focus: Take steps to protect your family business
There’s nothing more important in the world to you than your family. However, your family-owned business probably comes in second. So when it comes to protecting both your family and your business, you need to carefully consider your moves.
As you know, you face plenty of challenges to keep your business running smoothly — but it can be even more difficult to pass the family business on to your children or other relatives. In fact, according to the Small Business Administration, only 33 percent of family-owned businesses survive the transition from first generation ownership to the next generation.
Why is it so hard to keep a family business intact? Sometimes, it’s because no one in the family has an interest in running the business — but many times, family businesses disintegrate because of the lack of a succession plan.
To create a succession plan, your first step — and possibly the most important one — is to collect the thoughts and preferences of family members on their future involvement with your business. It’s essential that you know who wants to really do the day-to-day work and who wants a lesser connection. During these conversations, you’ll also want to discuss other key business-succession issues, such as the retirement goals and cash flow needs of retiring family owners and the personal and financial goals of the next generation of management.
Once you have this knowledge, you can begin to study the various business succession arrangements available to you.
For example, you could consider a family limited partnership. Under this arrangement, you, as general partner, would maintain control over the day-to-day operation of your business, but, over time, you would give limited partnership shares to your family members. Eventually, you would also relinquish control of the business to whoever is going to run it.
Alternatively, you could establish a “buy-sell” agreement, which lets you keep control of your business for as long as you like — for the rest of your life, if you choose. But during your ownership, you can name the buyer for your business — such as one of your children — and establish a sale price. Your child could then purchase a life insurance policy on your life and eventually use the proceeds to buy the business, according to the terms established in the buy-sell agreement.
Keep in mind that we’ve just skimmed the surface of these two business succession techniques. They can be complex, so before choosing either one — or any other arrangement involving the transfer of your business — you will certainly need to consult with your legal, tax and financial professionals. It’s important that you fully understand the tax implications of any succession plan as well as the financial effects of a plan on all your family members.
In any case, once you’ve chosen a succession plan, you’ll need to work with your legal advisor to put it in writing and communicate it clearly to all family members. Surprises are welcome in many parts of life — but not when it comes to transferring a family business.
You want to leave your family a legacy. And if that legacy is the family business, do whatever it takes to pass it on in a manner that benefits everyone involved. This will take time and planning — but it can be well worth the effort.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor John Zezini. Contact John by calling (916) 933-9888 or e-mail [email protected]