When exiting your family business, you will need to choose whether to sell your company to an outside party or have your family take it over. If you decide to keep the business in the family, you have to consider the issues that will impact the success or failure of your plans. There are personality and control issues to take into account, as well as the need for income, and family dynamics. In order to have a lucrative succession, you must have open communication, adequate planning, and insight.

Opposing needs and values

The specific needs of businesses, as opposed to families, are often not the same. They will essentially affect the company, as family responsibilities and individual opinions come into play. For example, does the business use excess cash flow to expand into new markets or to help finance an ownership transition? In addition, it is often hard to look past family relationships, and consider your heirs as employees.

Establishing a family council to make objectives for both business and family is typically an effective strategy. Written exit plans help ease the stresses of the transition process, and help train your family for their new functions. Furthermore, estate planning is vital in order to ensure that the assets go to your children, and not taxes. Both succession planning and estate planning afford clarity to all family members involved.

Assuming a new role after the exit

There are often identity factors that can result from a family business succession. The older generation may have issues determining their new identity when making the transition. Similarly, the younger generation may need to uncover their new identities, as owners of the company. There are often individual adjustment periods, as the heirs work hard to prove their abilities to their predecessors. Also, it may be difficult for the senior owners to have full confidence that their children are capable of running the establishment. Parents often find it hard to envision their children in a position of power.

Will I be able to retain financial security?

Another factor relative to a business exit is to determine how the owner of the company can retire comfortably. There are certain retirement plans that are tailored to the specific needs of proprietors. If you have not yet considered your retirement choices, now is a good time to do so.

You could set up a deferred compensation plan while you are still running the business. With this strategy, you can receive income while working. However, a percentage of your salary would be withheld until you retire or exit from the business. Additional options are financing simplified employee pensions, IRAs, simplified IRAs, or 401(k) plans.

If you decide to retire in the near future and do not yet have a retirement plan in place, you could choose to sell the establishment. When selling a business to family, funding plans such as private annuities, installment sales, and self-cancelling installment notes (SCINs) can provide income over a certain time. Another possibility is a lump-sum payment, which affords you an amount of money for investment purposes.

Maintaining a lifestyle for the surviving spouse

Like many owners, you may wish to provide finances for your spouse when you die. If your business is your sole source of income, you need to assure that your partner will be financially secure after the company is taken over. There are various methods (life insurance, buy/sell agreements) that allow for a smooth transfer. Your significant other could be entitled to profits from the sale of the company. But, be aware that most establishments are not allowed to pay wages to a spouse after the holder dies.

How will final expenses be handled?

If you die and still control the company, there could be a need for funds to finance estate taxes and final costs. If you are incorporated, your estate may be allowed to sell back shares of stock that are equal to your estate taxes and any closing expenses, according to a 302 stock redemption.

It becomes clear that family business continuation is a complex process. But, by tackling the issues with a comprehensive approach you will greatly increase your chances for achieving success.