David Ryan: Hard questions for next generation in business

As a family-business owner, thinking you have a succession plan in place and actually having one are different beasts. I often meet people who tell me they want to leave their business to their children.

"I have a succession plan in place," they will say.

I often wonder, Do they?

According to a study conducted by the Family Business Institute, 88 percent of current family business owners believe that the same family or families will control their business in five years. The study then revealed that only about 30 percent of family businesses actually survive into the second generation, 12 percent into the third generation and only about 3 percent of all family businesses operate into the fourth generation or beyond.

As time goes by, the odds for success go down dramatically, and the odds of failure skyrocket. Are there other options than to leave the business to a family member? There are a number of ways to leave the company intact and leave your family secure, without all the headaches of running a business.

Business owners need to diversify to minimize risk. Business owners typically will have between 60 percent to 80 percent of their net worth tied up in business or business-related real estate. As retirement approaches, however, no more than 25 percent of a family's net worth should be tied up in one such asset group.

One method of asset protection and diversification is to sell either all of, or a portion of, the business to a private-equity group. This creates liquidity for the family. The proceeds from the sale can then be diversified into a collection of high-quality assets such as stocks, bonds, mutual funds, real property or other suitable investments. Proceeds can even be put into a trust, so family members can receive monthly distributions. This powerful method can create wealth for future generations.

If a portion of the business is sold to a private-equity group, those family members still active in the business can continue to run the company, receive salaries and have an equity stake in the business. Care must be taken to ensure the equity group is well-capitalized and financially committed to seeing the business grow. In many cases, this is an ideal situation. The business will have access to the funding needed to grow and will have expert advice from the talent that grew the business to begin with. All of these factors create the potential for a successful transition.

Initially, some owners say they do not want to have a partner -- even a well-capitalized one. However, many of today's successful companies have financial partners. In these tough economic times, it is rare to find a family that has the expertise and experience as well as the self-sufficient capital to successfully transition a business to the next generation.

These equity partners often are not in the business of running a company. They are in the business of value creation. They need the current, experienced management to run the business. This shift is what often is needed to take many of the family-owned businesses to the next level. Personal financial risk is reduced, while opportunities for family estate-building are increased.

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