If you own a family business, retirement isn't simply a matter of deciding not to
go into the office anymore. You've got some critical questions to answer like...
How can I ensure my business will survive the transition into the next generation?
Less than one-third of family businesses survive the transition from first to second generation ownership.
Of those that do, about half do not survive the transition from second to third generation ownership. At any
given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. Founders are trying to
decide what to do with their businesses; however, the options are few.
The following is a list of options to consider:
- Close the doors.
- Sell to an outsider or employee.
- Retain ownership but hire outside management.
- Retain family ownership and management control.
There are four basic reasons why family firms fail to transfer the business successfully:
- Lack of viability of the business.
- Lack of planning.
- Little desire on the owner's part to transfer the firm.
- Reluctance of offspring to join the firm.
The primary cause for failure is the lack of planning. With the right succession plans in place, the
business, in most cases, will remain healthy.
What's involved in succession planning for family businesses?
Transferring the family business requires the family to make a determined effort to do the following:
- Create a business strategic plan.
- Create a family strategic plan.
- Prepare an Estate Plan.
Prepare a Succession Plan, including arranging for successor training and setting a retirement date.
These are the four plans that make up the transition process. By implementing them, you will virtually
ensure the successful transfer of your business within the family hierarchy.
What is a business strategic plan?
A business strategic plan defines goals, objectives, and targets for a company and outlines its resources
will be allocated in order to achieve them. When a strategic business plan is in place, it allows each
generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure
that everyone has a clear picture of the company's future. A strategic plan is long-term in nature and
focuses on where you want the business to be at some future date.
What is a family strategic plan?
The family strategic plan establishes policies for the family's role in the business and is needed to
maintain a healthy, viable business. For example, it should include the creed or mission statement that
spells out your family's values and basic policies for the business, and it may include an entry and exit
policy that outlines the criteria for working in the business. The plan should consider which family members
desire to have a part in management of the business versus those who desire a more passive role.
What is an estate plan?
An estate plan is a written document that outlines the disposal of one's estate and includes such things as
a will, trust, power of attorney, and a living will. An estate plan is critical for the family and the
business because, without it, you will pay higher estate taxes than necessary, allocating less of the estate
to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family
business is transferred in a tax effective manner.
What is a succession plan?
A succession plan identifies key individuals who will be groomed to take over the business when the time
comes. It also outlines how succession will occur and how to know when the successor is ready. Having a
succession plan in place goes a long way toward easing the founding or current generation's concerns about
transferring the firm.
How do I know whether I have what it takes to run my own business?
Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for
starting a business include wanting to be self-employed, wanting financial and creative independence, and
wanting to maximize your skills and knowledge.
When determining what business is "right for you," consider what you like to do with your time, what
technical skills you have, recommendations from others, and whether any of your hobbies or interests are
marketable. You must also decide what kind of time commitment you're willing to make to running a
Then you should do research to identify the niche your business will fill. Your research should address
such questions as what services or products you plan to sell, whether your idea fits a genuine need, what
competition exists, and how you can gain a competitive advantage. Most importantly, can you create a demand
for your business?
What should I include in a business plan?
The following outline of a typical business plan can serve as a guide that you can adapt to your specific
- Financial Management
- Concluding Statement
What should be included in the introduction to my business plan?
The introductory section of your business plan should give a detailed description of the business and its
goals, discuss its ownership and legal structure, list the skills and experience you bring to the business,
and identify the competitive advantage your business possesses.
What should be included in the marketing section of my business plan?
In the marketing section, you should discuss what products/services your business offers and the customer
demand for them. Furthermore, this section should identify your market and discuss its size and locations.
Finally, you should explain various advertising, marketing, and pricing strategies you plan to utilize.
What should be included in the financial management section of my business plan?
In this section, explain the source and amount of initial equity capital. Also, develop a monthly operating
budget for the first year as well as an expected return on investment, or ROI, and monthly cash flow for the
first year. Next, provide projected income statements and balance sheets for a two-year period, and discuss
your break-even point. Explain your personal balance sheet and method of compensation. Discuss who will
maintain your accounting records and how they will be kept. Finally, provide "what if" statements that
address alternative approaches to any problem that may develop.
What should be included in the operations section of my business plan?
This section explains how the business will be managed on a day-to-day basis. It should cover hiring and
personnel procedures, insurance, lease or rent agreements. It should also account for the equipment
necessary to produce your products or services and for production and delivery of products and services.
What should be included in the concluding statement of my business plan?
In the ending summary statement, summarize your business goals and objectives and express your commitment
to the success of your business. Also, be specific as to how you plan to achieve your goals.
Is a home-based business right for me?
To succeed, your business must be based on something greater than a desire to be your own boss: an honest
assessment of your own personality, an understanding of what's involved, and a lot of hard work.
You have to be willing to plan ahead and then make improvements and adjustments along the road. Overall, it
is important that you establish a professional environment in your home; you should even set up a separate
office in your home, if possible.
What legal requirements might affect a home-based business?
A home-based business is subject to many of the same laws and regulations affecting other businesses. Be
sure to consult an attorney and your state department of labor to find out which laws and regulations will
affect your business. For instance, be aware of your city's zoning regulations. Also, certain products may
not be produced in the home.
Most states outlaw home production of fireworks, drugs, poisons, explosives, sanitary or medical products,
and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
In terms of registration and accounting requirements, you may need a work certificate or a license from the
state, a sales tax number, a separate business telephone, and a separate business bank account.
Finally, if your business has employees, you are responsible for withholding income and social security
taxes, and for complying with minimum wage and employee health and safety laws.
How can I avoid running into cash flow problems in my small business?
Failure to properly plan cash flow is one of the leading causes of small business failures. Experience has
shown that many small business owners lack an understanding of basic accounting principles. Knowing the
basics will help you better manage your cash flow.
A business's monetary supply can exist either as cash on hand or in a business checking account available
to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills),
serving as a cushion in case of emergencies, and providing investment capital.
The Operating Cycle:
The operating cycle is the system through which cash flows, from the purchase of inventory through the
collection of accounts receivable. It measures the flow of assets into cash. For example, your operating
cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on
account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash
sales and accounts receivable - credit sales. Accounts receivable are usually paid 30 days after the
original purchase date. This applies to both the inventory you purchase and the products you sell. When you
make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your
inventory, receivables are usually collected, which increases your cash. Now your cash has completed its
flow through the operating cycle and is ready to begin again
Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations,
and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a
result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow
or in a net drain. Any significant changes over time will also appear.
A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to
compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must
be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle
money that could be invested. The objective is to develop a plan that will provide a well-balanced cash
What steps can I take to improve my business cash flow?
To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a
number of ways:
Collecting receivables: Actively manage accounts receivable and quickly collect
overdue accounts. Revenues are lost when a firm's collection policies are not aggressive.
Tightening credit requirements: As credit and terms become more stringent, more
customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt
expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run.
Looser credit allows more customers the opportunity to purchase your products or services.
Manipulating price of products: Many small businesses fail to make a profit because
they erroneously price their products or services. Before setting your prices, you must understand your
product's market, distribution costs, and competition. Monitor all factors that affect pricing on a
regular basis and adjust as necessary.
Taking out short-term loans: Loans from various financial institutions are often
necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common
types of credit used in this situation.
- Increasing your sales: Increased sales would appear to increase cash flow. However, if
large portions of your sales are made on credit, when sales increase, your accounts receivable increase,
not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not
be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's
Should I keep a cash reserve in my small business?
You should always keep enough cash on hand to cover expenses and as an added cushion for security. Excess
cash should be invested in an accessible, interest-bearing, low-risk account, such as a savings account,
short-term certificate of deposit or Treasury bill.
The family dynamic complicates the whole transition because of the relationships and emotions involved.
people are not comfortable discussing topics such as aging, death, and financial affairs.
Comfortable or not, succession planning should be a priority for any family business considering that
than seven out of ten family-owned businesses fail to survive the transition from founder to second
typically falling prey either to estate taxes or family discord - or both.
Developing and implementing a well-designed succession plan is essential to the survival of a family
from one generation to the next.
We help you with these key issues -
Keeping it in the family. Are you going to pass the business on to your family or sell
to a third party? We help you weigh the advantages and disadvantages of each of these
Who's going to run the business when you're gone? Management and ownership are
not one and the same. You may decide to transfer management of your business to just one of your
children but transfer
equal shares of business ownership to all your children, whether they're actively involved in the
Minimizing the tax bite. The tax burden when transitioning a family business can
be significant. The challenge is that a family business is not generally a liquid asset, but taxes
are typically due
when ownership is transferred.
- Making it fair. Transferring family ownership often adds a tremendous amount of stress to
individual family members. We talk with each of the family members to ensure that they feel they a
getting an equitable
and fair share of the pie.
Once we understand how you feel about the key issues above, we begin constructing your succession plan
focusing on these 5 issues...
- Business Valuation
- Business Restructuring
- Tax Consequences
- Retirement Projections
- Tax Projections