How to Pass Down Your Family Business

Providing financial freedom and leaving a legacy for your family is a goal of many business owners. You have spent years building and growing your small business and want to see it in the hands of your family for generations to come. If you haven’t taken time to plan for what will happen to your legacy if you retire, get sick, or pass away, now is the time to start. Learn how to pass down your family business and what to keep in mind as you prepare.

What to Consider When Passing Down Your Family Company

Succession planning is typically left on the back burner. In fact, surveys show nearly 50% of family businesses haven’t created a succession plan, although three out of four of those businesses hope to transfer ownership to a family member someday. As an entrepreneur, you need to clearly define who will have control of the business if you get sick or pass away. If you don’t, you’re putting your future plans at significant risk.

Building Your Succession Plan

Are you planning to transfer ownership to your children or grandchildren when you pass? Or are you hoping to see the family business in the hands of the next generation with your own eyes? In either case, you’ll need an estate plan that considers financial obligations such as income tax, estate taxes, and gift taxes. While your first concern should be what is best for your business, it’s important to reflect on how choosing a single successor can impact familial relationships. You may be able to give your other heirs larger shares of assets like real estate, investments, or life insurance proceeds.

You can also pass down the family business as a gift. However, this method of wealth transfer may require you to keep your name on financial documents and could lead to long-lasting tax implications. On the other hand, you can sell your small business to a member of your family who can buy the business outright or through a structured buyout agreement where, for example, they take out a loan and pay in installments over five years or so. The financial and tax aspects of passing down a small business can be complex. We always recommend working with a business advisor, financial planner, tax attorney, or a combination of the three to determine the most advantageous process for you.

Mentoring the Next Generation

Identify which family member, non-family member, or key employee you’d like to name as your successor. When evaluating your options, assess your potential successor’s attributes. Do they have managerial skills? Are they fit for entrepreneurship? Someone may be adept at managing routine operations and employees but lack focus on overall long-term business strategy. In the end, you may decide that passing the business down to multiple successors is the right decision for you and your company. Begin mentoring your family’s future business owners and introduce them to the day-to-day operations of your company. To ensure a smooth and successful business transition, go over short-term and long-term business plans, marketing strategies, and record-keeping and financial practices.

4 Pitfalls to Avoid to Ensure a Successful Transition

As you begin preparing to pass down your family business, keep these four pitfalls in mind:

1. Failing to plan for long-term business goals strategically. This is not a process you want to go at aimlessly.
2. Not accepting that passing down the family business takes time. Start early by meeting with the next generation and a trusted team of advisors. Consider bringing the third generation of your family into the mix.
3. Lack of communication about the desires of potential successors, the future of the business, and more. It is more than likely that the future owner of the family business will have a different vision and will aim to evolve operations slightly and gain new business.
4. Dodging complicated family dynamics. Communication is key to a successful transition.

Exiting the business you’ve worked so hard to build is a huge deal. You want to ensure it ends up in the right hands. Sunbelt Business Brokers can ensure you have access to the right resources, advisors, and financial assistance to lead you to your desired outcome. Contact an office near you today!