Business Succession Series: What to do when handing the business down to heirs
A business is a legacy that can be passed on, which makes it common for business owner to hand their business down to their adult child or children. However, it’s important to carefully prepare for when the time comes to introduce one or more child to the business.
Make it a business transaction. To do this, the owner should work with other professionals to create a succession plan. A valuation expert, CPA, and attorney can all help to create and execute a successful succession plan. This is particularly important when there are multiple children in the family to ensure there’s an equalization of inheritance and financial value. Having a plan can protect the family dynamic and allow emotions to be set aside in the business decisions.
Strategically plan the best time to bring them in. While some business owners may decide to bring their successor into the business right out of college, there is a benefit to bringing them on board after they’ve had a few years of business experience. An experienced business professional may be quicker to learn the business operations than training a recent college graduate. The chosen successor should be involved with the business, in some capacity, for at least five years before the parent begins to step out of the business. This timeline allows for the next-in-line to understand the business under the direct supervision and training of the business owner.
Create clear expectations about timelines, duties, and how success will be measured. Many business transitions fail because there are no set expectations and a lack of understanding responsibilities from the start. It’s important for both parties to have clear guidelines to prevent potential misunderstandings, and preserve the best interest of the business.
Regardless of whether an entrepreneur will transition the business within the family or sell it externally, it’s critical to have a contingency plan in place in the event they can no longer run the business. With any business transition, having a guide is key and if passing the business down to a loved one is that plan, following these key steps can help families navigate the process.