October 04, 2018
Succession planning can be one of the most challenging aspects of owning and operating a family business. And while many family business owners may dream of passing ownership of the business onto future generations, keeping the business within the family isn’t always a viable option. When a clear successor within the family doesn’t exist, family business owners are faced with the difficult decision of who will take over the business when they are ready to step aside.
According to the Family Business Institute, two of the ownership succession issues that most often plague family businesses are technical mistakes and planning in a vacuum. If you are contemplating selling your family business to an outside buyer, a comprehensive succession plan that addresses a few key considerations can help ensure that you don’t make these common mistakes.
Determine an Appropriate Timeline
While selling your business may take as few as six months to close, positioning the business for sale—not to mention preparing yourself and your family emotionally—may take much longer. For many family businesses, beginning the process at least three years in advance is often necessary.
From an operational perspective, you may need time to clean up your balance sheet or lock down contracts with key vendors or strategic partners. If your business requires real estate to operate, long-term leases may need to be in place prior to sale. Additionally, you may need to secure agreements with essential employees and key management. Taking these preparatory steps can add value to the business when the time comes to sell.
Structure the Sale Thoughtfully
There are numerous ways to structure the sale of a closely held business—a lump sum sale, an installment sale, an earnout sale based on a percentage of future profits or a sale to a charitable trust. Determining your desired “end result”—as well as the potential tax implications of each of your options—will help determine how to best structure the sale of your business.
Selling a business often requires a team of advisors, including investment bankers, attorneys, business accountants and financial advisors to work through the various complexities. Making sure you have the right team of specialists in place can help avoid the common pitfall of planning in a vacuum.
Decide What’s Next
A large liquidity event is a major life development for a business owner. Selling a business can create issues related to cash flow, investment portfolios, how family property is held and how to set up trusts, among other things. A new approach may be needed to preserve your family’s newfound wealth, which usually includes diversifying your assets across industries and markets. As you plan the sale of your business, considering how to manage your windfall of cash and other assets may better prepare you for what lies ahead.
Beyond these technical considerations of wealth management, former business owners often go through an identity crisis following the sale of a business as they face challenging questions about lifestyle, how to raise their children and how to navigate the personal, familial and social complexities wealth creates. Working through all of these questions with a trusted wealth advisor can help eliminate many of the unanticipated anxieties you may feel leading up to the sale of your business.
Like all business decisions, selling the family business has its pros and cons. While a liquidity event gives you the opportunity to diversify your assets away from previously concentrated wealth and makes the estate planning process easier, giving up control of the business can also create emotional stress and upset family dynamics. When creating your own succession plan, it’s important to give yourself enough time to adequately plan for these challenges. Additionally, you may want to consult with a diverse team of specialists to ensure that you have as much information as possible prior to making a decision.
Cathy Schnaubelt is a senior wealth strategist for CIBC Private Wealth Management's Houston office, with more than 35 years of industry experience. In this role, Cathy is responsible for the development of integrated wealth management solutions and provides comprehensive estate and financial planning services to high net worth clients.
This article originally appeared on Forbes.com on Aug. 30, 2018.
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