5 succession-planning questions for family businesses

Baby boomers privately own more than 12 million businesses across the country, according to California Association of Business Brokers, and with the oldest members of this generation now approaching their mid-70s, some are thinking about transitioning out.

The problem is, business owners are busy running and growing their companies and often too busy to think about how they might exit the business. “Retirement” is not a frequent word in their vocabulary, which often results in a lack of retirement-planning, both for the future of the company and with the family finances.

When it comes time to leave the business, I recommend using specialists to help plan for how the transition will affect both sides of the equation.

With a unified succession plan in place, business owners are able to approach the switch with confidence, helping to reduce the anxiety of the owner, employees and family.

Business owners have five personal family questions they should consider to help get organized for a future business shift:

1. Is a family member willing - and able - to take on the successor role and continue running the company?

If this is the case, your income stream could be quite different than if you sold the company outright. You'll want to create a transitional agreement that will include a retirement income for you and your spouse.

If your successor is not able or willing now, will there be a point in the future the family member may be ready? Often shifting control of the business to a family member puts the owner in a situation with conflicting objectives - doing what is best for the company versus what is best for their personal income and liquidity needs. With proper planning and time to address these issues, an owner can draw up a strategy to maximize both interests.

2. Is philanthropy an interest for you and your spouse now or in the future?

Timing a philanthropic opportunity to counteract the capital gains taxes garnered at the sale makes sense financially. Techniques and options to maximize charitable giving and minimize income taxes can be executed prior to a move from the business.

Additionally, creating a charitable entity can provide for family continuity after leaving the business, giving the family a common purpose.

3. Should trust funds be established for future generations?

If you plan for children and grandchildren to inherit or benefit from the sale of your business, it may be more beneficial for both you and them to have a trust established and funded with business interests before the changeover of the company.

Simple planning techniques created before an event can significantly increase the transaction value to the family as a whole. A trust may be more tax efficient, and provide an opportunity to pass wealth to loved ones while also placing guidelines on how and when money will be distributed to your heirs.

4. How will each family member handle the wealth?

This may be the hardest question to answer. If your family didn't always have abundant resources, will everyone be able to responsibly manage the new pot of money? This is something you may want to discuss carefully with your spouse to create the best plan for that income when it comes to fruition.

It is important to realistically visualize both your life and your family members' lives after the transaction, most importantly spending time with your family before the event to educate and share purpose and expectations.

5. Do you need to sell the company at the highest price, or would a lower price with fewer restrictions be better for the family retirement plan?

With a retirement plan in place, you may be able to negotiate the sale of your company to benefit you in terms other than the final dollar amount. For example, sellers are often asked to offer indemnities or cover other risk factors, but if they negotiate for a lower selling price that still works within their retirement income needs, they may be able to negotiate out of those risks and retire with less stress.

As these questions are discussed and the answers finalized by the business owner, it's much easier to get a business succession plan - with the family financial plan - in place. You may not be thinking about retirement or any other type of business changes now, but when working with your financial, tax and legal advisers, with a plan in your back pocket, you, your company, and your family will be better prepared when the eventual transition is needed.

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