Family businesses are important, but too many falter due to a lack of direction and leadership. On one hand, family-owned enterprises represent nearly half of gross domestic product and employ more than 80 percent of the United States workforce.
On the other hand, two out of every three family businesses do not survive past the first generation. Proper business succession planning can save many small businesses from fading into oblivion.
Small business owners need to know their options and plan accordingly. Broadly speaking, they can choose to (1) retain family ownership and control, (2) retain family ownership but hire outside managers, (3) sell to an outsider or current employee or (4) close the doors and dissolve.
In any case, the goal should be to instill in new managers and owners an “ownership mentality” and clear understanding of the mission, purposes, strengths and weaknesses of the enterprise.
Often, family communication barriers doom the process before it can even begin.
Family members should join for a “summit” to openly communicate and discuss the fate of the business. A retreat allows each relative to get away from the bustle of everyday life, ask important questions, and catch the vision for the future of the business.
A third-party facilitator should be brought in to lead the discussion from an objective point of view.
Among the issues that need to be discussed are whether successors have the drive and abilities necessary to continue the business and whether any decision should be swayed by concerns for the future of employees. The summit should culminate in a written succession plan distributed to all family members.
In communicating openly, it may become evident that the family no longer wants control of the business. Rather than selling, the family can still retain ownership – and some of the profits – while relinquishing day-to-day management duties.
Separating ownership and control requires carefully selecting and training current employees or outsiders. It may also require reincorporating the business, selecting a board of directors, or forming a limited liability entity in place of the current governance structure. Furthermore, this option requires family members to oversee managers and the general health of the business. But day-to-day operations will no longer be the family’s worry.
For families that want out completely, selling the enterprise is an excellent option. A sale requires a detailed valuation of the business and its assets and a comprehensive sales agreement that relieves the family of all obligations.
Selling is a much better option than simply closing the doors and auctioning off equipment and inventory. Any viable enterprise has value beyond its balance sheet – in intellectual property, trade secrets, customer loyalty and other “goodwill” items.
Years of hard work have built a business that others are willing to pay for. Don’t let that value go to waste.
Finally, business succession planning should never be done alone. Your legal and financial advisors need to help you in the process. Although there are plenty of steps you can take independently, investing in a team of counselors will yield a more profitable and risk-free result.
Lisa Lowe is an attorney in the Vancouver office of regional law firm Schwabe, Williamson & Wyatt, focusing her practice in the areas of business planning, estate planning and commercial and real estate transactions.
