Family owned business can be tough; especially since family is forever and a business lasts as long as the front doors can stay open. A family business can never be truly free of passion, so it is important to understand the importance of utilizing consultants from outside of the family in conjunction with a Trust and Estate planning team to help come up with a succession plan that truly makes sense.
Mom and Dad may feel like their oldest child should run things, but the truth may be that the best person equipped for the task is the youngest sibling. An independent third party can make such suggestions and provide the family with the best plan that is truly “passion free”. A well laid plan will simultaneously preserve the family business as well as the family relationships.
Realistically Valuing Your Family Business
Routinely reviewing the actual value of a business (after all its debt obligations) is the only way to determine what a business is worth. Factor in changes in the industry, projections and growth plans. Now compare the anticipated worth to what you feel you will need for retirement or what you want to have in your pocket when you sell your interest. Is there a shortfall? Perhaps it is more than expected?
This total, no matter what it is, is the number that a business owner will need to actively manage to. If the value of the business is less than anticipated, a new investment or tax strategy may need to be put into place. If the total is higher than expected, planning should go into that outcome as well.
The kindest and most loving thing any family member can do for another family member is clear planning. Being as transparent as possible as to the health and overall standing of a business is key to a successful transition of ownership or management.
No one wants to inherit a pile of junk.
The same rule applies when leaving your business to the next generation.
Creating a successful business succession plan for a family business can be complex and time consuming. Putting experts in place to make the process more strategic is key.
Below is a list of experts every business owner should have on their team.
Not Steve, your best friends’ nephew who does divorces and can help you out with stuff for free. A bon a fide business attorney who has expertise in the type of business you are in. You don’t go to the dentist for a kidney transplant. Why? Because you know not all doctors are alike. Don’t think expertise required amongst the different disciplines of attorneys is any different. You need a legal expert to draft and review contracts, write formations, protect you from lawsuits, update operating agreements, file your trademarks and navigate you through the process of selling your business. Most importantly, family businesses are incestuous enough. Bring someone to the table whose loyalty is to the success of the business and not their sibling or parent.
Find one, use one. Don’t trust one of the most important aspects of being a business owner to “Do it Your Self” tax filing services. The way in which your business handles your taxes could cost you thousands, thousand that you may need to retire. Take your financials and taxes serious and don’t cut corners.
I’m not talking about the teller who services your change order or runs your deposits for you. A solid business banker who has experience with other successful businesses. In order to grow, your business will at some point or another need a loan or at least some good advice about how to handle cash flow. The kind of banker you need is sitting in an office helping other business owner as yourself all day long. If they haven’t found you yet, you need to go introduce yourself.
Things to do regularly to prepare for eventual transition to the next generation: Your well-business check up.
- Review your existing Operating Agreement and Bylaws. Everything up to date? Is everything addressed? Do you reference a business succession plan in these documents? You should.
- If you have addressed a buy/sell agreement has there been consideration as to how it is going to be funded?
- Keep up to date reporting on all the business debt as well as the business’s assets. Are the assets valued correctly? Has depreciation been factored in? Is the correct interest rate listed for the debts and credit accounts? Are the rates fixed or variable? Sudden unaccounted for changes to accounts such as interest rates and fees can have a big effect on the valuation of a business and your succession plan.
The devil is in the details as they say. That is very true when it comes to passing on a business to family members or selling it outright to an outsider buyer. Make sure your details are correct.
Contact us or give us a call at 505.848.8581 to set up a consultation.