By Eric Reich
There are roughly 32.4 million family businesses in the U.S. currently. Those businesses employ 62% of the U.S. workforce and contribute to 64% of the total U.S. total GDP. These statistics are astounding to some people, given the proliferation of giant companies we see every day. Studies show that 70% of family business owners want to transition their business to someone within the family, yet only 30% of those transactions are successful. This week, let’s explore why many of these transfers fail and how to improve your odds of a successful transition.
Let’s start with why intergenerational transfers are popular:
- The obvious is because it preserves your legacy. You’ve worked a lifetime building your company, and being able to keep it within the family can continue your legacy.
- It protects the confidentiality of the transaction. Many owners don’t want others to know what value the business sold for, and an intergenerational transfer is one of the best ways to protect that.
- Control is certainly a motivating factor as well. By not selling to an outside party, you can still exact some measure of ongoing control over the company. Though, as we will discuss in a bit, that isn’t always a good thing.
What are some of the issues that come up in trying to transfer your business to the next generation?
- Price: It can be hard to sell a business to your children for “full price”. In some cases, I have seen owners leave literally millions of dollars on the table by transferring their business to their kids.
- Lack of preparedness in the next generation: While your children may have worked in your business, that doesn’t mean that they are ready to just take over and assume all responsibilities for it.
- Family drama: Having multiple children in the business can be great, but it can also be a source of conflict when you depart. Who is in charge when there are multiple children in the business, all of whom undoubtedly think they are qualified to run it? This can create a lot of family conflict. And don’t forget about children that are not in the business. They will likely be expected to be treated “equally”.
How do you work to help ensure a smooth transition? Start by involving them in every facet of the business so that they will become capable leaders when you depart. Perhaps let them buy smaller pieces over a longer time. This can help you realize some of the future growth, which can offset a lower initial sales price.
Lastly, plan and communicate.
Before they leave their business, regardless of who they are transitioning it to, every owner should extensively plan the next steps. Your Financial Advisor, CPA, and Estate Planning Attorney should all be involved from day one. They should also be working together, not in silos, to help you develop your plan. There are a multitude of estate, tax, and financial considerations that can be unique to each transaction, depending on how and to whom you are transferring your business. Knowing those in advance can help ensure the best results. Once you establish the plan, you absolutely must communicate it to those you intend to take the business over! They should be involved in every step of the process. They might not need to know specific amounts and so forth, but they need to know the overall plan if they are expected to be able to take over the business.
My final thought is that once you complete a transfer, unless you are asked for help, walk away! If you have prepared the next generation properly, then there should be no need for you to try to override decisions or exert pressure on your family. Let them run it the way they will run it. It might not be exactly the same way you would do it, but in many ways it could be better given the younger viewpoints. A successful transfer of a business is never easy, but if it is planned properly and well communicated, it can be successful as well as personally rewarding.
Source: businessinitiative.org. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
