Wednesday, January 18, 2017

Succession planning: How to hand off your business to your kids (or somebody else)

"The brave may not live forever, but the cautious do not live at all.”Richard Branson, international business entrepreneur who is selling his Virgin America airlines to Alaska Airlines.

In the region where I live near Portland, Oregon, many small businesses are owned and operated by women.
In fact, Portland is known generally as a town where smaller, family-owned businesses have thrived, unlike its coastal neighbors to the north and south -- Seattle and San Francisco -- where the behemoths of industry dominate the landscape.

Women-owned businesses that I know about have successfully operated in the health care industry, are in retailing and marketing, hospitality-travel and real estate. In addition, women I know have worked side-by-side with a spouse to build businesses in such diverse industries as manufacturing, construction, automotive supply and trucking.

Many of these successful enterprises were launched by people born after World War II who have put their heart and soul into their business over the past 25 or 30 years. But what happens when these Baby Boomers, now in their 60s and early 70s, begin to age into retirement? Should they sell out or let the kids carry on?

It is never too soon to start talking about succession planning with your kids or with younger employees who might want to take on operations when it is time for you to step-away.

“Those that work on a plan will have a much better chance of a hand-off,”  Ted Austin, senior vice president with the Private Client Reserve of U.S. Bank in Portland, told me.

According to industry statistics, 25 percent of family business transfers fail because of poor succession planning, he said.

“The biggest obstacle is around communication," he said. "Some people build a business with the idea someone will buy it. For others, the family name is on the door with the expectation the operation will stay in the family. One way or another you have got to talk about it.”

For business succession planning to succeed, Austin recommends these steps:
  •  Start talking sooner than later within the family about how to handle the legacy of your hard work.
  •  Find out if the next generation is interested in continuing the business or if you should begin looking into a buyout by a group of employees or an outside investor.
  • Set up a plan for how the transition will work. What’s the timeline? How will responsibilities be shifted? Will dad and mom still come to work every day even though they may no longer be in charge? How will employees be kept in the loop?
Austin at U.S. Bank suggests that a good exit plan may spin out over a five- or ten-year period after a lot of questions have been answered.  For instance, will it be a buyout by the children over time or will ownership shares be gifted to the next generation?
“The more clarity in the plan related to legal governance of the business going forward means less stress during family gatherings at Christmas or while on a family vacation in Bend. Austin cautions that mistrust or misunderstanding can put a damper on family events.

Building an advisory team

Good succession planning may mean putting together a team of professional advisers – an attorney to write out a legal agreement, a financial planner to help with estate and retirement planning and a bank trust officer who can advise on tax strategies, creditor protection and asset management.

“Depending on the complexity, this professional help will cost money,” Austin said. “Make sure the family understands that cost.”

Succession planning evolves with the business but doing it sooner than later can make the difference between a successful transition and disaster.  Advisers at SCORE, a national small business mentoring network, say that business owners should not shy away from succession planning because it looks too far in to the future.

“Devising a formal plan that outlines who will own and operate the company, once you are not in the day-to-day role, is a critical path decision that has a direct impact on long-term business profitability,” they say.

Before embarking on an exit strategy, business owners should seek legal advice and possibly a “business evaluation expert” who can help make sure every transition option has been, considered, the Small Business Administration recommends.

“Without naming names, if you drive down Portland’s Broadway you will see a lot of families that have built wealth, generation by generation through a growing family business,” Austin said. “Where it has gone extremely well, family members have been involved in the business. They have been able to look under the hood so that when it comes time they will be as ready as they can be. Or they decide this isn’t something they want to do, so everyone can plan for that change.”

Will the business founders be able to pass on the company to his or her next generation or will a new owner step in with a buyout, ready to take the reins? That business succession conversation must launched by the business owner with her family.

Why not make it happen this year!

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