We know that building a thriving family business takes a lot of hard work, and to ensure the business continues to thrive, it takes foresight and planning. When business owners are preparing to transition the business to the next generation of leadership, it is critical to have a well-considered succession plan to guide them.
To ensure a successful transition, there are three critical areas to focus on:
Compensation. A common pitfall for family business owners is not having a well structured compensation plan in place for the next generation of owners. This generally happens when parents own a successful business and have gained considerable wealth from that business. Along with their desire to pass the business on to their children, they also have a desire to pass assets as an inheritance. When the children come on board, it can be tempting for the parent-owners to combine their children’s work compensation with the anticipated inheritance. This can be dangerous, since the child will be earning more than is appropriate for the position and may suppress his or her desire to work hard to earn success. To avoid this, parent-owners should pass non-business assets to the next generation using other vehicles like trusts to ensure the inheritance is not tied to work compensation.
Financial planning. Joining the family business is not an instant guarantee of lifelong financial success, which is why it is important for the next generation of business owners to start planning for their own financial future – home ownership, parenthood, retirement, etc. Once the next generation joins the business, it is important for them to have a true picture of the company’s financials so they can accurately gauge their future earnings potential and plan for it.
Communication. Succession planning is both an art and a science, and there is no “one size fits all” for every situation. Frank, honest communication between the generations is critical to achieve buy-in on all fronts. Succession planning is also not a “set it and forget it” process; the best succession plans are flexible enough to be able to adapt to different variables that affect not only the business but the business owners as well.
We can help you.
If you’re a small or mid-size business owner, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit. We can help you plan for the successful transition of your business when the time is right.