Legally, financially and emotionally, it can be a complicated process. Here are six tips to consider before handing down the family business.
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No. 1: Decide whether or not to pass down the business in the first place.
"Unfortunately some people don't have the talent or the confidence to run the business, and this can not only destroy the business, but also the family," said Steve Goodman, President of SHG Advisors in Mellville, New York. "So the most important first question is to decide whether or not they should even pass it."
Conventional thinking for most small business owners is that if a child is interested in running the business, they automatically inherit it. But parents should ask themselves the hard questions and decide if their children are capable and also how it will affect their relationships with one another, Goodman said.
No. 2: Ensure the business plan is updated or intact.
When the founder or owner of a business is preparing to leave, it’s important that the original business plan has been updated to reflect changes and is still intact for future reference, according to Eric Gelb, vice president of Small Business Advisors in Armonk, New York.
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“In addition to a typical business plan, I would include a roles and responsibilities section in the plan. You have to figure out where the business is before you take it on, and that’s best laid out in a solid plan,” Gelb said.
Of course, not every business has a written plan. In those cases, the current and future owners of the company should hold strategy meetings before the reigns are passed.
"You should lay out the main goals and objectives and figure out who is good at what," said Gelb."
No. 3: Ensure proper account transitions.
"If you have a business where the outgoing family members are doing the day-to-day with the customers, it's important the heirs understand the existing accounts they are taking over," said Gelb. "The customers need to see the continuity and see they are well taken care of."
Account transitions should take place over a three to six-month period so the clients are used to the change and the family members stepping down can help to assuage any problems that might occur.
"If you are a small business with a personal touch, you want to make sure that it's business as usual after you leave. It goes back to the principal of customer loyalty and customer retention," said Gelb.
No. 4: Ask honestly: What will the business look like without the current owner?
"It's important to meet with the heirs and have an open and honest discussion about their personal goals for the business, their desired level of participation, and what the business will look like without the owner in it," said Jim Malski, president and founder of The ActionCOACH Next Level Firm in Westport, Connecticut.
Just because the outgoing owner of a business is passing the company onto his children, it does not mean they share the same vision for the company's future, Malski said.
"It's through these types of conversations that we find out people don't like working with their cousin or their sister, and they could be headed in very different directions professionally," he said. "The last thing you want to worry about when you're running a business is breaking up fights."
No. 5: Consult with the experts.
If you don’t have one already, make an appointment with a financial planner and/or attorney. Before a business can be passed down, things like life insurance and estate planning must be addressed and documented, according to John Graziano, president of Future Financial Planners in Bayonne, New Jersey.
"Making time for that conversation is one of the most important things you can do for your business, because if something were to happen to that key person, would the business have the financial means to continue?," said Graziano.
"So often people are too worried about day-to-day operations, cash flow, employees and taking care of customers, that they haven't taken action to start that process," he said.
No. 6: Don’t be afraid to let the children take the reigns.
“When a parent is running a business, they are used to making all the decisions, but they’ve got to back up enough to let the child handle things,” said Graziano.
If any parent is going to successfully “let go” of the business they’ve nurtured for so many years, they have to give it a test-run, Graziano said.
“It’s important for the parent to be able to back up, take a back seat and guide the child without stepping on anyone’s toes,” he said.
Likewise, it’s good for the parent to step back long enough to see if the children can handle running the business without running to mom and dad for help.