The COVID-19 pandemic has prompted many business owners to fast-track their succession plans—but managing a successful transition requires careful planning that can't be done overnight.
For both wealthy and non-wealthy business owners worldwide, keeping the business in the family is a top priority, PwC's 2021 Family Business Survey found. Nearly two-thirds of respondents said it's an important long-term goal for them.
However, even in families where both older and younger generations share a desire to keep the business in the family, there are a number of challenges to handling a successful transition, according to Mike Benedict, BOK Financial® business transition advisor.
For example, sometimes members of the next generation can't afford to buy the business, said Benedict. "How do you sell a $20 million business to someone who makes $150,000 a year? Well, it can be done, but it takes time, and it takes planning," he explained. Most family members can't simply write a check for the business."
On the flip side, simply gifting the business to a family member isn't a viable option for most, according to Benedict. "Most parents would prefer to simply give the business to their children," he said. "The reality is oftentimes they can't afford to do that because the parents need to extract some value out of the company to be able to afford a comfortable retirement."
And once they do take over the family business, it might be difficult for the next generation to maintain the same lifestyle that their parents had from the business income if the business hasn't grown, Benedict added.
Meanwhile, to maintain family harmony, business owners are also tasked with being fair and equal to family members who are active in the family business and those who are not. For example, Benedict described Bob and Cindy—who have one child, Linda, who will obtain 100% ownership of the family business in five years, and another child, Steve, who is an actor with no interest in participating in the family business.
To keep the situation fair, Bob and Cindy might consider giving Steve immediate non-business gifts that match the value of the business gift that Linda will receive or put some investment assets of an equal amount in a trust that he would receive after the death of his parents.
"You typically will have business-active children and non-business active children, and you will have business assets and non-business assets. I would strongly encourage you to avoid commingling the two," Benedict said. "I've seen examples where they have been commingled, and it can generate a lot of tension within the family. It makes Thanksgiving very awkward."
Considerations for planning a family business transition
Despite business owners' desire to keep the enterprise within the family, only 34% of respondents to the PwC survey said they have a "robust, documented and communicated" succession plan.
Drafting such a plan can be a lengthy process, Benedict said. The planning process alone involves the collaborative work of business transition advisors such as himself, CPAs, state attorneys and corporate attorneys. It takes about four to six months to get the business valuation, learn all the aspects of the business, and give the family opportunities to have conversations about the transition.
"And that's just the planning portion itself," he said. "Then, the implementation takes another couple of months to draft all of the initial documents and get it running, so it's not something that can typically be done in one or two meetings."
Once a business transition plan is in place, it's important to communicate it to employees, including those outside of the family.
"Remember that your business is the livelihood for your employees, and they will want to know that a plan is in place," Benedict explained. "They don't need to know the details, and they may not want to know the details, but they will be comforted to know that there is a plan, and they will feel more secure about their work environment."
Having such a plan—including a set date for when your exit from your duties will take place and help from financial professionals—also can help smooth the business's transition to a family member, Benedict said. For example, getting professional advice can ensure you are getting the full benefits of the lifetime tax exemption on gifts and estates that the IRS allows.
"It's important to have a plan and work with sophisticated advisors that have experience in this area," he said.
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