Family-owned businesses are the backbone of our economy. Between 80% – 90% of all businesses in the US are family enterprises. They account for 50% of our GDP and 60% of all jobs in the U.S. We aren’t just talking corner grocery stores and fast-food franchises (although those are important, too). Enterprising families own 35% of Fortune 500 companies and control 60% of public companies.
In addition to creating financial wealth for our country, American workers, and their owners, family businesses often create a sense of happiness and securities within the family. What parent-business owner doesn’t dream of handing down the family farm to their children one day as a legacy and asset.
I love the thought of multi-generational family businesses. When I consider companies that have been handed down parent to children, and then from children to grandchildren, I see many of the same elements that make for happy retirees.
For instance, most folks in family-owned enterprises are doing something they love. This is a perfect example of your career doing double-duty as a core pursuit or a life passion. Often in these multi-generational businesses, family members also have more time to devote to other core pursuits because the workday is more flexible than if they were to work for someone else.
On the financial side, owning a business is a great way to get to fund your retirement, as your income could be multifaceted – business income, passive income, and diversification could all contribute to your bottom line. In this way, a family-owned business is parallel to income investing; you own an investment in a company that kicks off income in addition to your other investment vehicles.
With all these benefits comes an added layer of work, and that work lies in family communication and planning. You may have decided that little Johnny is going to take over the business one day, but what if Johnny has other plans when he gets older?
“While the majority of family business owners would like to see their business transferred to the next generation, it is estimated that 70% will not survive into the 2nd generation and 90% will not make it to the 3rd generation,” says the Family Firm Institute. So, it’s not just your family. Many American families are struggling with the idea of if and how they can pass their business on to the next generation of entrepreneurs. Enter business succession planning.
When it comes to planning for passing your business on to your children, there are three “F’s” to keep in mind: Family Communication; Financial Realities; and Filing Taxes. Let’s talk a bit about each of these components.
1. Family Communication – There’s a great scene in Monty Python and The Holy Grail where a nobleman, describing his castle and realm, tells his son, “One day this will all be yours.” The son replies, “I don’t want it. I want to sing!”
Such could be the case in your family (well, maybe not the castle part). I understand this issue from first-hand experience. Growing up, my father was a veterinarian. Being around his practice taught me one thing: I did not want to be a veterinarian. Nowadays, I see the same thing in my kids, who can’t stand to go to the radio studio with me on Sundays when I do my Money Matters show.
It doesn’t matter if your business is a dental practice, a plant nursery, a chain of convenience stores or a good ol’ fashion farm – if the kids don’t want to do the work, there’s not much to be done about it. What you can do is have the conversation about whether they want to take over the business sooner as opposed to later. That way you can all talk about goals and expectations and ensure you’re on the same page.
One other key component is whether your children are qualified to run the company. An important point to remember is that you will have to give up control, which can be emotionally challenging for many entrepreneurs. But, in my experience, this is the only way towards business succession happiness, so make sure you are comfortable and confident about the transition.
2. Financial Realities – Let’s say that your children are interested and qualified to take over the business. The next question to ask is whether they can afford to buy you out on a timetable that works for you.
Say, for instance, you are in your 60s and your kids are in their 30s, just getting their feet wet. Can they afford to buy a business for $1 million? $5 million? $10 million? This analysis is formulaic. If you have a vet practice, for example, that’s valued at $1 million, you could likely sell it to a private equity firm for $1.2 million. That’s a lump-sum check.
But your kids would likely need time to pay this sum, or anything close to it. It’s necessary, then, to ask if they can afford to pay you over the next 5, 10, or 15 years and whether you can afford to wait that long.
3. Filing Taxes – Whatever you do, don’t forget that Uncle Sam will want his share. Under the new tax law, a couple can exclude $22.4 million in 2018. That’s a hefty sum. But, depending on the value of your business, there may still be a big tax bill left over that your children would have to pay. Again, can they afford it? This is especially challenging in the case of businesses with illiquid assets. In fact, the tax bill could be a barrier to making the transition of the business to the next generation.
Passing your business onto the next generation can be a challenge. But, if you are a successful entrepreneur you have met and overcome any number of obstacles in your career. If you and the kids want this to happen, you can do it. As with other areas of business and financial life, it might pay to work with a professional to chart the best path towards this admirable goal.