Main Street Launch’s Senior Vice President Robert Lattimore offers tips for entrepreneurs who are considering how to plan for their exit from their small business.
Family businesses make up about 89% of business tax returns from 24 million family businesses in the United States. These family businesses employ 62% of the workforce (or 82 million people). Family businesses represent the silent, virtually invisible majority of the world wide free enterprise system.
The majority of family members (88%) assume the business will stay in the family when the owners retire, but succession statistics undermine this belief:
- Only 30% of family-owned businesses survive into the second generation.
- Only 12% are still viable into the third generation.
- Only 3% continue to operate into the fourth generation and beyond.
When businesses do get passed to the next generation, it’s often a struggle to decide how to fairly divide up the business.
As business owners get ready to retire, the most common attempt is to sell to non-family members (48%). Approximately 25% of business owners intend to transfer their business to a family member, and the other 25% made no plans for their business. An important part of ensuring your business can carry on once you retire is to start succession planning well in advance of your future retirement.
When business owners and their advisors talk about succession planning, they’re almost universally talking about ownership succession. In fact, ownership is one of the key ways businesses define themselves as family companies. Many family businesses perceive “ownership by family” as the most important characteristic in determining whether or not they’re a family company. Determining who will own the assets of the family business in the future is an important task for any family business that wants to carry on into the next generation.
As the owner, you have two major considerations: who will control the asset (the business itself) and who will manage and run the daily operations during the transition. Whether you own a restaurant, dry cleaning business, retail store, yoga studio, or distributorship, someone in the family will have to oversee administration, operations, sales, marketing, and client fulfillment. Without planning for this area (known as management succession planning), your business is likely to fail. A family member, current employee, or sometimes a new hire can be a good resource for managing the business during the ownership transition.
During a transition, it’s important to work to create a common vision for the next stage of the business and establish clear communication with all the family members. Clearly defined roles for each family member, the process for the overall transition, and strategies for growing revenue and profit after the original owner exits are just as important as the legal transfer, tax implications, financing, and division of profits as part of the sale.
Frequently when you speak with family members who were part of an active and intentional succession plan, they feel overwhelmingly more prepared for their new responsibilities. This attention to management succession readiness leads to increased financial stability of the business, increased value of the business, harmony among family members, harmony among employees, and a solid financial foundation for the family business.
At some point in time, sooner than later, all business owners will have to make a decision about what to do with their family business. If you want to build wealth within your family and leave a legacy in your community, succession planning is a key ingredient. Start with you CPA, lawyer or business advisor, and end with your family and employees. Ownership succession and management succession each have their role. Remember to focus on both.
Contact your local Small Business Development Center to find a resource to help you with succession planning.
