Early planning key to successful business transition

Business foundersEarly planning key to successful business transition

January 19, 2022

Key things to know

  • Successful business transitions ideally begin with planning ten years prior to the transition and with successor leaders identified at least five years prior to assuming control.

  • Establish a foundation of success by building trust, creating a communications plan and preparing the next generation of managers and owners.

As a business owner, you’ve spent considerable time and effort building your successful enterprise. What happens when you’re no longer in the driver’s seat? Have you considered how to protect yourself, your family and your business through a transition?

If yours is like most family-owned businesses, no formal succession plan or successor leadership waits in the wings:

  • Only 30% of family businesses survive through the second generation
  • Only 13% of family businesses survive through the third generation
  • There is a 70% failure rate in transfers of wealth from one generation to the next1

Successful transitions are the result of early planning—ideally, ten-years prior to the transition and with successor leaders identified at least five-years prior to assuming control.

A common business succession planning myth is one of the primary barriers to beginning the planning process: that succession is all or nothing, that you must give up income and control. This could not be more inaccurate. In fact, your continued leadership through a gradual hand-off may contribute to the effectiveness of your succession plans, enabling you to continue to build upon your legacy.

Keep the following elements in mind as you prepare to transition or sell your business.

Establish a foundation for succession planning

The foundation of success begins with building trust, establishing a communication plan and preparing the next generation of managers and owners. Then, develop your mission and vision for the company’s future, determine the timing of succession and identify who will be involved.

Studies have shown business succession failures are generally not the result of poor tax, investment or legal advice. Instead, lack of communication and inadequate preparation of the next generation drive 85% of wealth transfer failures.2

  • 60% of wealth transfer failures due to lack of communication and trust
  • 25% due to inadequate preparation of next generation
  • 10% due to no family mission
  • 5% other (poor tax, investment or legal advice)2

Special considerations for keeping it in the family

Management succession is especially important when considering a family transfer or if you plan to continue as a debt or equity holder in the company. Identifying successors raises questions:

  • Will they come from inside or outside the company?
  • Will they emerge from family or from existing staff?
  • Do they have the ability and experience?
  • Do they really desire the position?
  • Do they have the buy-in of key stakeholders?
  • How will they and other key personnel be incentivized to stay?

Another key consideration is: when will you be ready to relinquish ownership and control? Will you continue in some role, stay on as an advisor, have a seat on the company’s board or retire completely?

Structuring your business to transition

Only after you’ve built a solid foundation should you begin structuring your business for transfer, valuing the business and ultimately executing on your transition plan.

The transition of business ownership can be viewed under a number of lenses, each revealing a spectrum of unique opportunities and challenges.

  • A family transfer could be structured as a gift, a sale or a combination of the two.
  • A sale to a third party can be completed in any number of ways, including: an asset sale vs. a company sale, a sale for cash vs. a sale for stock, or a combination.
  • An employee or management buyout, like a family transfer or third-party sale, has multiple possibilities.

No matter which option best suits your mission and vision, you must consider whether you’re willing to continue on as a debt or equity holder and how that will impact your post-transfer cash-flow.

A common business succession planning myth is one of the primary barriers to beginning the planning process: that succession is all or nothing, that you must give up income and control. This could not be more inaccurate.

After a sale, the transition to a financial enterprise should be carefully deliberated and implemented. The process may require a host of new financial and legal structures, and often, an entirely new family vision and mission.

It can be beneficial to work with a team of specialists through the entire business succession process. From addressing your long-term strategic vision to coordinating pre-sale planning, they can help ensure your family builds on your success through the transition of your business and beyond.

Learn how Ascent Private Capital Management works with and supports business founders and owners.

 

1. Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability and Family Leadership. John Ward, 1987.

2. Institute for Preparing Heirs, 2011.

Request a call.

Let’s start a conversation. Please request a call and an Ascent wealth management professional will contact you shortly.

Find an office.

Ascent’s regional team locations across the U.S. offer personalized support and a full suite of wealth management services.

BUSINESS FOUNDERS

Ways to pass on business knowledge after selling the family business

The sale of the family business doesn’t have to mean the end of an entrepreneurial legacy.

PERSONAL LEGACY PLANNING

How private foundations can unify intergenerational families

Seventy percent of wealth transfers fail from one generation to the next. Private family foundations may provide intergenerational families an opportunity to overcome this challenge.

Start of disclosure content
Disclosures
WI-002 Not-not-may: Bank only
WI-021 Opinion disclaimer: Bank only
XX-021 Tax/legal advice - Bank only
WI-201 Ascent Family Office Services
WI-118C EH Credit Products only