As a business owner you have spent much of your life forming, laboring, and stewarding one asset. Sure it has components, but this combined vehicle has created more wealth for you than any other, mostly thanks to your blood, sweat, tears, and resolute determination. You are finally able to spend more time benefitting from the fruits of your labor than working all night.
You would like to give your heirs the opportunity to extract comfortable wealth for the rest of their lives, especially since they can benefit from your hard work without having to duplicate it.
Either way, time is pushing you ever closer to that fork in the road. Addressing succession head on seems wiser while you will still be around to advise, casually supervise, and mediate disagreements. A few trusted and capable employees have taken on many of your prior responsibilities so you can work normal hours for the first time in your life. In five more years, these key employees could put your family’s ability to extract wealth from the company at risk, unless the next generation comes in and moves up.
What should you consider before throwing an offer in front of your heirs?
Know What You Need
Your financial plan and future needs must be crystal clear. If you extract too much value from the company in a transition, you put the future viability of the asset at risk. And depending on future laws, your heirs may have to pay unnecessary estate or inheritance taxes just to get the money back. Conversely, if you take out too little, a difficult situation could arise where you have to humbly ask your children for more of your wealth that you gave to them. ‘Skin-in-the-game’ is a consequential motivator to consider, even if you are comfortable financially. A mistake on your personal financial plan will completely undermine all the effort and expense of everything else.
Intellectual Honesty
You must be honest about the capabilities, competency, and interest of each of your heirs. You must also acknowledge the value of key employees, and accurately assess their loyalty. If someone is consequential to the ongoing success of the business make sure they are willing or motivated to stay as word gets out. And plan on word getting out to other employees sooner than you want (which can happen just by leaving this blog on your screen). One heir convinced his dad to sell the company that he had no interest in running. The heir took some of the proceeds and started a company with a novel product that in a few short years grew to 10 times the size of the sold company. The father’s humility allowed the son to flourish, and create his own wealth machine.
Equitable Versus Equal
This always comes up in situations with multiple heirs. As parents we want to treat our kids fairly. At Christmas we buy the same number of gifts. We try to save the same amounts for college. Equal. But in the more serious parenting responsibilities we think differently. For example, we discipline each child differently based on their responsiveness. And as the elder sibling always asks why you went easy on the younger, you simply justify it with, “Because I am the parent.” Or consider protection. Getting your teenage daughter a performance sports car is low risk, since she cares more about the color than the horsepower, but a teenage boy is safer with a 4 cylinder. Equitable. Giving each child what they need to have the greatest chance of success in life. Some people are born for business. You were. Many are not. Balancing equity and equality within the succession of a family business requires careful planning to avoid serious family issues in the future.
Plan For Big Contingencies
Many companies are successful because they make unpopular decisions in difficult circumstances, triumphing when the populace went the other direction and failed. An organization that thrived with an authoritarian structure may not perform as well with a democratic or socialistic structure. Predicting heirs’ and employees’ adaptation to a new structure is impossible. Creative planning allows for irresolvable differences to be permanently settled amenably. But these terms must be known in advance.
Employ a Team of Competent and Experienced Advisers
While a few resources and certifications exist related to family business succession planning, talk with business owners who have successfully transitioned their business under similar terms as you are considering. Ask them about the professionals they employed and their impression. Unless your situation is clear-cut (i.e. only one heir already leading the business competently and has stated they want to own it), you should explore alternative professional advisers for succession planning. Everyone needs to check hubris at the door to successfully transition the company that has benefitted you, your accountant, your attorney, your insurance agent, and your financial adviser over the years.
The professionals should have numerous personal experiences with succession planning. A high percentage of family businesses fail to survive the second generation. The succession of a family business is hampered by an extraordinary blend of financial, social, and relational factors. Your life’s work should not be someone’s dry run.
Aaron Coates, CFP® CIMA
Financial Advisor
Valeo Financial Advisors, LLC
Indianapolis, IN
