When you own a family business, it is highly likely that part of your long-term goals is to pass the firm’s ownership to one of your children in time. If this has been a long-running tradition in your family, starting from your grandparents, then it only makes sense that you’d want to maintain it. After all, if you were able to run your business successfully like how your predecessors did, then surely, your heir can do the same.
However, the succession process is one of the toughest challenges in family businesses. As such, most fail to remain a family-owned firm after the second generation.
But what could go wrong if you trained your successor the way you were taught? Why would they fail if they’ve been actively participating in the business years before taking ownership?
A lot, it turns out. Below are the possible setbacks and legal issues that may arise in your succession planning:
The Difference in Leadership Style
Family business succession is commonly built around the idea that the next generation of owners will run the business in the same way their predecessors had done. But what this fails to consider is that heirs are likely to have a different leadership style. They may have a different skillset from their parents, as well as strengths and weaknesses.
Therefore, when you assume that your heir can take over without studying the nature of the job, you may be setting your business up for failure.
This major setback is likely to happen as well if you have other children that will assume passive ownership. Since their roles won’t be as vital, your next CEO may skip consulting them when making decisions. Thus, the family business’s success can be put at stake during a critical time.
Even if employees in a family business expect of one of the family members to lead them soon, fostering familiarity can still be a challenge. Research reveals that job hunters have divided opinions about working for family-owned firms. Meanwhile, employees may experience dissatisfaction or unhappiness while transitioning into the new leadership.
Retention planning, the most common strategy used in keeping a business, comes with taxation issues. Often, businesses that are “gifted” face the obstacle of raising funds to pay estate taxes, which is a requirement nine months after the predecessor’s death. Life insurances and assets can cover for the estate taxes, but if they’re insufficient, the IRS may allow alternatives, including the sale of the business.
Hence, it’s crucial to work with a financial planning attorney while mapping out your estate and succession plan. Finance professionals must review the company’s existing insurance policies. They may find something to leverage in it, such as a disability plan, for instance. Because if you had been disabled at a point while running the business, a group disability plan could be activated. That spares the business’s assets from being exhausted for such expenses.
Family businesses can also use the buy-sell agreement method to pass down ownership. That sells business ownership to employees, family members, or interested outsiders. In the buy and sell agreement, the interests of the business will be bought and sold at a predetermined price, or when the previous owner dies and becomes disabled. It also helps set an estate tax value for the business, so a legal and financial professional must be involved.
You can reduce the chances of these possible setbacks and legal issues by welcoming change, seeking outside advice, being open-minded, not committing to succession decisions too soon, and talking openly about the future. Acknowledge that your heir may have a different leadership style and that your other children may have more to put on the table. Times change fast, so what worked for you may no longer suffice for tomorrow.