We've written about this issue previously, but it's worth revisiting because it comes up again and again with new clients.
The Wall Street Journal recently published two great articles on bringing children into the family business and the unique succession issues family businesses face.
These articles offer great tips, from giving the kids "psychometric assessments to ensure their personalities and capabilities fit the jobs contemplated," to using third-party facilitators to handle formal communications between disagreeing family members.
Frankly, for as much calculated thought entrepreneurial clients put into running a business, many avoid putting much thought into who'll run the place after they're gone.
They also may not have determined how much money they'll need in order to exit the business (retire), or under what terms they would transfer ownership of the business (sell). If they plan to sell, will the buyer be a relative, an employee or someone outside the picture?
"I Thought Junior Would Take Over"
Many small and mid-size business owners assume that their adult children will step in. But let's face it - sometimes kids think their parents' jobs are boring and they want no part of it.
For example, Sam wants to retire and regularly prods his adult daughter to take over managing his three funeral parlors. He would also like to receive income from the business during his retirement.
However, his daughter has never expressed interest in running the business. She's in her mid-40s, still lives with her parents, and fancies herself a budding author. Sam's false hope in changing his daughter's career choice will eventually force him to sell his business for less than it's worth, or shut it down and miss out on retirement income because he didn't do reasonable succession planning.
On the flip side, more than one child might want to take over the business, and the conflict could wind up in court and tear the family apart. We've seen it happen.
More Bad Assumptions
Another misstep a client can make is creating a business that's too dependent on an individual owner. If a client is not only the chief executive, but also the decision maker for all sales, marketing, and customer service roles, who will handle those roles when he or she retires? Having a mid-sized business be too dependent on the owner can hinder a company's sale price.
We've also met business owners who overvalued their company's worth in order to get what they want for it if they sell. For example, if a client thinks her contracting business is worth $3 million simply because that's how much she figures she'll need to live on after she retires, that's not strategic planning. She should speak with a mergers-and-acquisitions advisor to get a realistic appraisal of her company.
If that appraisal amount doesn't match her retirement needs, she'll need to either adjust her plans or come up with another financial strategy to make up the difference.
Don't Put It Off, Do It Now
Clients should talk about what they want to have happen to their businesses after they're gone. We can show them what might happen if they don't start to make some choices now.
And finally, when a client decides it's time to sell their business, they should find a qualified attorney to aid with the sale. Too many businesses have undersold when an owner handled the transaction without the assistance of expert counsel.
To learn more about common estate planning issues, check out our free guide, Estate Planning Pitfalls: The 12 Most Common Threats to Your Estate & Your Family's Future, or to discuss your estate planning concerns, please call our office at 919-443-3035 or use our contact form.