After giving everything you could to make your business a success, and ever since your children joined the business, you should be very pleased building your dream with them beside you. Now, you want to pass or transfer the business to your extended, so that the business survives and grows your legacy.
Not too much to ask for is it? Well statistics are not on your side if you want this to be successful!
Some historical analysis has shown that only 30% of the country’s family-owned small businesses make it to the 2nd generation, with only 15% percent make it to the 3rd generation, i.e. your grandchildren.
The lack of leadership and entrepreneurial spirit in the next generation can cause the business to stall. Sometimes it is a lack of proper intergenerational retirement planning is the business’s undoing, e.g. the struggle of funding the retired owners’ pensions from the profits may stifle risk taking and expansion.
But nothing impacts a business like the sudden death or disability of its owner!
Developing a formal succession plan can help you address these issues up-front, so your family isn’t left to sort out everything.
Your plan can also help you address other critical succession factors, such as selecting and coaching your heirs to take over the business and how to deal with family future financial needs. There are a variety of strategies that can be used to transfer your business to the next generation, including:
Transfer through inheritance. The most obvious way to pass your business to your family is through your will, but you need to consider:
Taxes: With inheritance taxes and death duties your heirs could be forced to sell the business to pay the tax bill. A possible way to avoid this is to establish a trust, and this would buy an insurance policy on your life, so that on your death, the policy’s proceeds can be used to pay the tax bill.
Your spouse’s income needs: If transferring the business ownership to the children makes sense at your death, consider your surviving spouse’s income needs. Your salary stops at your death and your spouse will now rely on profits from the business. Will the company be able to maintain the same level of profits after losing you?
Active and inactive business inheritors: If you leave your business to your children who may be active or inactive in the management of the business, future problems may arise. For example, some children who are active in the business may want to reinvest profits while inactive inheritors may want the profits to be distributed. This could cause a serious cash flow crunch, or even worse, the inactive inheritors could end up selling their equity to outsiders.
Anf many more financial and personal issues to be addressed.
Each of these and other concerns involves complicated financial, estate, tax, and legal considerations – that is why it’s not a good idea to tackle succession alone. Establish a team of experienced professionals to help you develop your succession plan. Your team can help you weigh the pros and cons of each transfer strategy and determine which one is best for you and your family and of course the future survival of your business.
If you as an owner manger wanting to consider the best way to transfer your business and put in place a flexible succession plan, call Phil on 07720 397040 or email him or alternatively contact him via this form below.