22 Jul How Do I Pass On My Family Business?

When it’s time to retire and you’re a business owner, leaving isn’t as simple as just picking a day on the calendar. It requires thought, communication, and legal action. If you intend to pass your business on to your children, grandchildren, or other family members, careful planning will ensure a seamless shift. 

Give this transition the time it deserves—don’t try to rush it! There are a lot of questions to answer, and many legal details to consider. We dive into the details of passing down a family business below, and explain how estate planning can help.

How to Transfer a Family Business to the Next Generation

Taking time with the process will let you nurture potential future leaders of your business. You can empower your family with the skills and knowledge they need to thrive in their new role. Be present to answer questions as you phase out of being in control all the time. This will foster a sense of stability within the business, reassuring employees, customers, and stakeholders alike. 

Moreover, a well-executed succession plan preserves the legacy and values of the business. It protects the company’s financial standing and reinforces the brand’s identity and reputation in the public. Ultimately, strategic planning paves the way for sustained growth and prosperity, laying a strong foundation for the business’s continued success under new leadership.

Ten steps to guide you through the process of a family business transition:

1. Give the Process Several Years 

Begin planning for succession well in advance. Ideally, start at least 5-10 years before you intend to fully leave the business. You have a lot of angles to consider. For example, are you going to gift or sell the company? Will you retain control for a period of time after the official sale? Will you continue on as an employee for a few years? 

Many semi-retired business owners choose to serve on the board of directors or as a consultant to supplement their income. Will that be you? Take some time to mull it over and to consult your family members and your current team about the best way to handle the transition. 

2. Identify Potential Successors

If you’re confident keeping the business in the family is the right choice, assess the potential of those who are interested in your job. Consider how capable they are by analyzing their skills, experience, and commitment, but leave your emotions out of the process. It’s easy to let your judgment be clouded by how much you admire or love someone, even against your best intentions. 

It might feel right to choose a family member you have good rapport with, or who matches your energy and drive. However, how much you like a person doesn’t always translate into how capable they are of running a company. You’ve likely put years of dedication, hard work, and heart into building your business—not to mention money—so be careful who you choose to be your successor.

3. Let Your Goals Be Known

Define what you want to achieve by passing your business to a successor. Whether it’s maintaining family control, ensuring continuity, or making your retirement easier, having clear goals will guide your decisions. 

For example, you could decide to sell a portion of your business in the beginning stages of the transition, prior to handing over complete ownership. If you are considering selling a portion of your business, you have two primary options: selling a percentage of your company or selling a specific division or unit. Selling a percentage, (a process known as a recapitalization) allows you to retire gradually and secure an income from your business while maintaining overall control. 

4. Develop a Succession Plan

Next, you’ll need to create a detailed plan outlining how ownership and management will undergo transition. Including timelines, roles and responsibilities, and contingency plans will make the transition successful. You have three options when it comes to the transfer. 

• Sell all or part of the business.

You could enter a buy-sell agreement, which is a legal contract that outlines how ownership will be transferred. It will include the purchase price, payment terms, and conditions triggering the buyout. It ensures a structured and fair transition with legal protection, and gives clarity on valuation methods (how the value of the business will be appraised).

• Gift the business to your successor(s).

For this option, you’ll need a professional valuation to determine the value of the business for gift tax purposes. You should consult a tax advisor or attorney to understand the potential tax implications and the best way to proceed. For example, you could slowly gift portions of stock while transitioning out of ownership, until the majority of the shares are held by your successors. 

• Create a living trust.

Deciding if your business belongs in a trust also takes some consideration. Small business owners often have a lot of wealth tied up in their companies. Setting up a trust can help eliminate or reduce taxes and safeguard your personal assets.

5. Communicate Early and Clearly

The next step is to meet with your key stakeholders, family members, employees, and advisors. Communicate your intentions, your expectations, and the rationale behind your decisions. Keeping everyone on the same page throughout the process helps to prevent confusion, misinformation, and rumors. 

6. Prepare the Next Generation

If your successor doesn’t have formal experience running a company, you’ll need to prepare them for their new job. Provide them with hands-on training, mentorship, and exposure to the everyday operations of your company. The training your successor needs will depend on their current skills and fiscal understanding. You may need to encourage formal education as well as on-the-job training and leadership development. 

7. Address Legal and Financial Aspects

You’ll also need to comply with state laws regarding ownership transfers and shareholder agreements. Legal and financial advisors can help you address issues such as estate planning, taxes, and ownership transfer methods (such as trusts or buy-sell agreements). 

Depending on your business structure (corporation vs. LLC) and size, legal requirements will be different. An attorney can ensure that your family business transfer meets all the legal requirements, including any necessary filings or amendments to company documents. Tax implications must also be considered, as transferring ownership can trigger gift or estate taxes depending on the value of the business.

8. Evaluate and Adjust

Continuously assess the readiness of your potential successors and the overall succession plan. Be prepared to adjust the plan based on changing circumstances or unforeseen challenges.

9. Document Everything 

Consider setting up a recording device to document your chats with important people in this process. You should then document your plan on paper and back it up digitally. Make sure you have both physical and virtual copies of all your agreements, policies, and procedures. This will reduce potential conflicts during and after the transition, and help you make sure the transition happens legally and transparently.

10. Seek Expert Help

Consider seeking advice from professionals specializing in succession planning, such as lawyers, accountants, and business consultants. Their expertise can help you navigate the complexities  of transferring your family business and ensure a smooth transition.

Contact Phelps LaClair for Help Transferring Your Family Business

Estate planning is much easier when you have professional guidance. Transferring your business to the next generation is often a long (and emotional) process. The tax and estate planning experts at Phelps LaClair can ease your burden by advising you on the best ways to protect your assets and minimize taxes. 

We can also help you set up a trust. Revocable living trusts give you more control over how your business will be managed in the future. They offer flexibility in timing and conditions, and since they avoid probate, trusts also provide more privacy and ensure a more efficient transfer.

Come chat with us at one of our locations throughout the Phoenix valley. We have years of experience helping Arizona families utilize estate planning to pass their businesses down to the next generation, and we would be happy to help you do the same. 

 

Image by Malachi Witt from Pixabay on 7.1.2024 | used under the creative commons license | photo was cropped from original version