There are many elements to review and evaluate when starting on a family ownership transition plan. Work needs to be done upfront, in the middle, and post-transaction. Without taking a holistic approach, critical steps may be missed, resulting in a rocky start, or no start at all.
From our experience, here are the essential considerations that will increase your chances of a successful transition.
The Upfront Legwork
The upfront work tends to be the most under-appreciated part of the process, but it usually dictates the overall success of the transition. The time involved here encompasses evaluating the exiting generation’s financial needs as well as identifying who the successors will be, not only from an ownership perspective, but also from a leadership perspective.
Getting a grasp on the financial requirements of an exiting generation is critical in determining which transfer channel(s) are appropriate, which ultimately drives the structure of the transaction. Identifying the successors far enough in advance provides adequate time to mentor them and obtain proper family alignment.
One of the biggest mistakes is assuming who the successors will be and what the transition will look like without including the relevant individuals in the planning process. Since these transitions often take several years to complete, it is a good idea to begin doing this upfront work at least three to five years in advance of an anticipated transaction. Working with family business consultants and financial planning specialists can be a major help when doing this work.
The Fun Stuff
The next phase is where most of the technical work of a transition is performed. The time involved here comprises the actual structuring and execution of the ownership transaction. These steps include evaluating which transfer mechanisms will be used and which best align with the goals of the exiting generation.
It is also critical to test these mechanisms against the financial soundness of the business. Structuring a transaction that overleverages your business will not be good for anyone. Consult your accountant, attorney, and banker when doing this work. These professionals will be able to draft documents, evaluate the tax implications, and help assess the financial soundness of your plan.
Post-Transaction Work
Lastly, ongoing maintenance of the plan is needed. This often entails providing continued leadership support to the next generation through peer groups, offsite training, or advanced education degrees in business or management.
In addition, the business should monitor the financial implications of the transaction. This is where having a well-crafted shareholder agreement that dictates the value, terms, and conditions of a shareholder buyout comes in handy. It is easy to monitor the financial impact each year once you know how to value the business and what the payout terms will be.
When you sit back and think about all of the work this process entails, you can see why family business transitions only have a 30 percent success rate from the first to the second generation, a 12 percent success rate from the second to the third generation, and just a 3 percent success rate from the third to the fourth generation. Carefully crafting and executing a well thought-out plan will benefit both your family and the longevity of your business.
Learn more about how to structure a successful family transaction at our upcoming seminar on Thursday, October 12. This interactive and information program will cover how to structure and execute the transaction, including a review of the mechanisms available to transfer ownership. Learn more and register.
Steven E. Staugaitis can be reached at Email or 215.441.4600.
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