Succession Planning: Leaving the Company in Your Kids Hands

Is there a simpler way of changing over your company then to a child or family member? For those of you who have seen family fights over politics, world peace, and angry teenagers you might start to believe that transferring your company to a family member could be a complete mess.

It is actually pretty rare that a company will continue to the follow family member and that the second time around it is even less common.

With this is mind it must also be noted that many companies do have success in passing to the next person in the lineage. There are a few steps that the current Owners must take during the Succession Planning process to make this transition smooth:

Income security separate from the company.

An equally fair division of the family and companies money.

During succession planning it is shown to be very challenging to trade hands smoothly, it is questioned if a better method can be found? If there is a way to guarantee success? In this article we will address those concerns and give clear actions to take to guide your success to having the company stay in the family but change hands.

Concerns and Complications in Offspring Succession

When looking at the pattern of adults hoping their offspring will succeed them in the business it can be seen that for many reasons the adults ultimately desire this:

Happiness in sharing a career.

A sense of comfort knowing that work is always going to be there.

There will always be the company to unite the family.

The company in which they have spent their lives is now theirs to run.

Not having to leave or sell entirely but having as much involvement as they want while the offspring takes over.

A sense of accomplishment knowing that the family has accomplished the success of their company.

This is all a quite beautiful thought; however it is often not quite that simple.  

The offspring’s don’t see eye to eye.

The desires of the offspring’s do not align.

Pushing out the owners before they are ready.

The offspring is not motivated to do the same work that the family company provides.

Family or not, anytime a business changes hands it is complicated, but with family involved a new layer of complexity is added. Don’t let this discourage you as it is not impossible when you focus on succession planning.  

A formula has been made to help this changing of hands. This formula is only successful if its six components are correctly picked and added. This will be your best hope.

The risk of failure goes up if any of these components are overlooked.

The current owners must have a Succession Plan in place.

There can only be one main owner in control.

Each offspring must be equally compensated.

The current owners are secure and ready to move on at the time of succession.

Whomever is taking over the business has proved their knowledge and passion for the company over time.

There are other options in place.

Each business and situation is different so these six actions will require special attention in areas for some and not for others. But the components will always stay the same for everyone, although, the succession planning can be altered for special circumstances. In a case that there is more than one owner succeeding this would apply.

These components are factual and proven to give you all the best shot possible in making the transition. By utilizing this formula there is a higher rate a good outcome.

Component One: The Current Owners Start their Succession Planning

Any business sell is a sticky situation but when offspring’s are involved it becomes extra challenging to transition. Everyone has a belief about the succession planning process and are comfortable enough to be vocal about it.

If this is your situation there is one clear answer: Stop the chaos. Use this succession planning process the exact same way others have. You have the flexibility in the plan to customize it to your worries and situation. Through this plan a singular goal and system is built by taking the highest concerns of the family.

Take these seven auctions for your Succession Planning:

First Action: Set clear goals

Second Action: Evaluate businesses worth and revenue. Estimate what new owner’s addition to these will be.

Third Action: Maximize businesses worth (motivate current star staff members and future owner).

Fourth Action: Find an outsider to buy (this step can be skipped if you are transferring business to family).

Fifth Action: Invest in your inner circle so that value is gifted or sold to the future owner.

Sixth Action: Always preparing for if you as the current owner or the future owner passes.

Seventh Action: Estate Planning and other legal documentation that puts the wealth where you want it once you have passed away.

It does not hurt to dive deeper into these actions.

First Action

State all of your Succession Planning Goals but make sure to include these:

What you need to make to maintain the lifestyle you want.

What is equal to dividing the money to each offspring?

What time frame is ideal to move away from the company and give up all rights?

This is the basis of your Succession Planning.

Second Action

You cannot just focus on what has to happen to achieve your goals but understand what assets you already have prior to your succession planning. The wealth of the company has to be understood and the future owners duties stated. It is common to subtract whatever the new owner’s prior additions to the company’s wealth so that they are not responsible to pay for their own work.

It is important to understand the worth of the company so that any improvements the new owner makes can be tracked and observed. In this process the new owner is protected from spending money on their own contribution.

Third Action

After establishing the person you want to take over the company and the worth of the business, there must be a plan in place to secure valuable staff members to create more worth in the business and develop loyalty from them.

Fourth Action

Typically we encourage an outside buyer for the purchase of a business but this is not applicable in your case.

Fifth Action

Formulating a plan to exchange the business from you to your offspring. Giving the opportunity for them to buy or granting them certain things if your financial situation allows it.

Sixth Action

Taking action to prepare the family and company to survive if the current owner passes away while the company is in process of changing hands.

Seventh Action

Current and future CEO take the time to create Estate plans that focus on the business. For the current owner this is how they can divide the wealth fairly to each offspring. This step will defuse tension or bitterness amongst those closest to you.

Component Two: Choose a Main Offspring to Run the Business

An individual who has planned their whole careers on making this succession as easy as possible is very easy to spot: The owner has one offspring and no others. This is not something you can change at this point. Here are reasons why choosing a single offspring is ideal.

Often times there are only two situations owners face when there are several offspring’s. More than one offspring has been involved in the company. This forces you to strategize how co-ownership with affect the business. The only other option is to choose one offspring and no others can be a part of the company. Now you have to take the time to divide your assets amongst each offspring equally.

The parents have to confront the fact that siblings who have fought over petty things their entire lives probably won’t benefit the business as they’ll fight over every detail of the company. Each child is unique with different ideas and goals with the only common thing between them is there genetics.

Co-ownership can absolutely be achievable: This is where two people willingly give themselves to a company because they have a united vision and similar goals. They both have invested, practiced, and passion for the company. For their service they are compensated on a priory chosen figure instead of being granted a sum. The thing that connects them is their desires and company, not genetics.

Because there is history a certain amount of tension and arguments. Just because some years have passed does not mean that sibling dysfunction is no longer there. Especially because a new condition to the relationship is presented: They probably are married. This adds another strong opinion to the pile.

Entrepreneurs often make friends with others who have companies themselves. Think about the percentage of them who share their business with a sibling. It is often rare that an owner has a partner with their company, with exception of the selling a slim amount to employees or investors.

Splitting the company with someone outside of the family is a rare thing as well because of the complications that can occur. An outstanding owner has incredible ambition, passion, loyalty, and ties to their company. An independent strong individual like that does not thrive in a partnership setting. This personality is ideal to work on their own so that they have control of their company. Even if it lessens the workload most owners would rather take it all on themselves.

Oftentimes in a company that has passed down the current owner at some point has a sibling for a partner. In time a main owner becomes the only one who still wants to be involved. In almost every one of these situations a single owner only works.

Component two, giving the company to an offspring, has to coexist with component three: spreading the wealth equally.

Component Three: Succession that is Fair to Each Offspring

This may seem like a no brainer to most business owners that each child must gain the same amount of wealth. Therefore, by granting a single offspring the wealthiest thing you own it may cause other offspring’s to feel cheated.

If you are able to give the child who is not taking over the business something equal in value, it makes the situation fair.

“Equal” is determined by the parent and what they deem is equal for each child. This completely bypasses what an offspring might think is equal. Understand the child’s point of view can be overlooked during the Succession Planning. You must put yourself in their shoes and truly deem what they would see as equal.

The child taking over the business could become jealous of the child who gained wealth by doing nothing.

One offspring is brave enough to fill your shoes in the company and invest themselves into it. It is assumed that you granted each offspring that opportunity but only this one took it. Why should this driven and dedicated offspring have to divulge their hard earned wealth to an uninvolved sibling?

You ran the company by yourself so it is probably true that your offspring would want do the same.

There cannot be a dictator. When there are multiple owners, but one has more power than the other, they often indulge in the benefits of the company more. When the primary owner grants themselves a larger salary or better benefits it has to be equal to the partner who owns less of the company but does the same amount of work. This can be challenging to the main owner.

The viewpoint of the uninvolved offspring has to be considered. The uninvolved offspring’s usually do not want to be a part of the company if offered something else.

Uninvolved offspring’s often would choose to be given wealth that do not require maintenance or responsibility. It does not normally make them bitter if they must wait until an Estate Plan goes into effect after passing.

In the case that an uninvolved offspring does own a percentage, have they gained anything of wealth? This offspring has now be granted no current revenue or perks from the company. Their interest in the company could only be sold to the owner. This doesn’t cause an issue because the owner probably doesn’t have the money to buy the interest. Even if money is not an issue, rarely will the children see eye to eye on the worth of the uninvolved offspring’s ownership. This can easily cause world war three amongst your children.

This means that by giving your uninvolved child a share, you have granted them something worthless, but the government will not agree. Taxes on the interest will maximize as the company increases in worth. The uninvolved child is forced to deal with this despite the lack of benefit.

The uninvolved offspring has no power in the company or say in what its goals should be.

When giving the company to one offspring the others have to be equally compensated. There are many challenges to accomplishing this:

It is possible that nothing else you own comes close to the value of the company.

Is it fair to give the succeeding offspring the worth of the company that you created? Is there a way for you to put a dollar sign to the worth of what they have already done for the company?

This offspring will also be getting their reward quicker than the uninvolved one. All of the benefits point to giving the offspring the company while you are still alive. But this is not fair to the uninvolved child who must wait until your death to receive their share. The explanation is easy: Any income outside of the company is yours to maintain your lifestyle, and your significant others after you have passed. This poses a considerable difference in the tangibleness of the inheritance the children receive. Although the uninvolved offspring is forced to be patient, their reward will be easily obtained and require no work.

If it isn’t already hard enough, you must consider that the offspring who obtains the business might make it more valuable in the future but that is hard to measure. This must be addressed in order to give equally to each offspring, think about this:

Is the offspring owning the business taking a low income and working more? This makes the business currently a burden rather than a benefit, yet rewards the offspring for their dedication.

Is the worth of the company increasing because of this offspring’s contributions? In this case this offspring should be rewarded for their dedication and not punished by receiving less of the assets.

Is this offspring detrimental to how comfortable your lifestyle is after leaving because they are making your interest more valuable? Therefore you have to ensure their commitment by granting them investments. Do not punish this offspring for their hard work.

Is this offspring giving you the full amount for the company or not all of it?

Is it possible to equally grant each child?

A group discussion must happen to determine what is equal and just. All aspects of the company and outside assets that are being granted have to be considered. You must respect each child and recognize them for the work they have done or not done, making the compensation just therefore equal. The goal has to be equality. Communication with all members has to be a part of the decision. A mediator could be helpful during this gathering.

After this process your Estate Planning has to be 100% completed before you pass or all the planning was for nothing. This grants the offspring who owns the company any ties you might still have with it and the other offspring’s access to those benefits from assets outside of the company.

Granting the Company to Several Offspring’s.

After learning all this do you still want to give more than one offspring the company? If the answer is yes, can there be a way to make this successful?

If this is your desire we have a few guidelines that seem to work for other business owners in the past:

The bond of the family must be of higher priority than the worth of the company or the love of money. The prosperity of the company is how well the family is doing rather than the company’s success on its own.

A particular offspring runs the everyday aspects of the company. This is because this offspring is a leader but does not own more of the company then the others.

The company is prospering so well that it can support everyone and give them separate duties.

The compensation of each offspring is not guaranteed but only comes with success and work.

Each offspring must be confident in their responsibilities.

The company has to stable with outside family members as instrumental parts of the company which guarantees revenue.

Component Four: The Offspring only Gains Ownership after the Owner is Secure and Ready to Move On

When owning a business it is supplying you with your means to survive. As the current owner you must be comfortable with your bank account prior to letting the company exchange hands. In order to be confident in your finances there are a few steps:

You are provided for enough that if you don’t receive the full worth of the company you will be okay. This is achieved by having alternative ways of revenue. Buying stock throughout the years in order to provide for you.

Having assets that are valuable to the company that could be rented back if the company needs them at any point. Usually this is in the form of land and real estate. By separating these from the company the worth of the company is less but allows the changing of hands to be easier because there is less taxation. This allows other offspring’s to rent or use these assets if they need them as well. This protects those assets even after the previous owner is gone.

If the owner is secure in their finances there is opportunity for the company to be sold for cash. It cannot be stressed enough how financial security must be achieved before even considering the succession of the company. In the situation that an owner departs prior to being financially comfortable the offspring must find ways to pay for the company.

As an entrepreneur, you must understand what goals you have for your financial state. If you are financially free without the obtaining the entire worth of the company, you must still be stubborn about receiving it or come to terms that you are losing part of the company. By gifting away things you must consider how equal this will be to other offspring’s. This must be considered during Estate Planning or offspring’s will be cheated.

You might be in awe that the independent of your finances is not relevant to the money gained by someone buying the company. If you are dependent on the money from the sell you are at extremely high risk for no success. Because we want you to succeed we will not suggest any other way of becoming financially free other than what we have already given.

The exchanging of money has to happen before the owner succeeds if the offspring is going to be paying cash. The offspring has to have full reigns of the company before affording the purchase price. For the amount of time that the company is being paid for, the owners may wish to stay in control of the business before succeeding. Documentation has to be made that if the offspring decides they cannot pay up, the owner can resort to an alternative party.

Component Five: Sufficient Proof of the Offspring’s Loyalty and Dedication for the Company in a Long Time Span Prior to the Exchange

What is proof of an offspring’s capabilities to obtain ownership of the company? Travel and take some time off, if the company is constantly calling or in dire shape without you the offspring is not ready. The routine work of everyday ownership is not enough to determine if the offspring can maintain the company in the future if the company expands, gains competitors, or the economy takes a hit. That is why you as the owner have to train the offspring in preparation for these things. Bringing in a third party to help with this process is advised as the offspring should be treated just like other staff members.

Component Six: Developing Another Option

There are many aspects and outside influences that can disrupt or doom your succession planning. This is a factor for any exchange of company ownership. It is extremely important to develop an alternative option. Here are some reasons as why another option could be needed.

Prior to the completion of this process you pass away, the Estate Plan has to be prepared to grant your wishes to the offspring’s desired.

The worth of the business has far exceeded the offspring’s capabilities to purchase, an outside establishment could be used to buy.

If the company is worth far more than you’d ever be able to gift to other offspring’s. Equality is detrimental to the success of this process.

A company can hit a point where a sole owner is not enough to keep the company afloat. It is not fair to force on child to bare this responsibility. A large buyer would be better suited at that time.

As you get deeper into the Succession Planning process, you might become aware that the chosen offspring is not passionate enough to carry the company. Your love and their commitment to you might have made you delusional in your decision. There could have been miscommunication in regards to the responsibilities of the company. This is when another option has to be considered.

When conflict of morals, style, or goals are evident it will become an issue. Occasionally, the owner can let go of these things and move on from them. If the owner cannot let go of their differing ideas certain insurance policies should be put in place so that if the offspring fails to run the business to the standard given the previous owner can resume their place.

Because of these concerns one must have another option ready.

Summary

Succession planning to give the business to a child is a decision made many years prior to leaving the company. When the offspring first shows interest in the company the idea usually pops into the owners head. Throughout their time working for the company certain ideas and guarantees are often made with the offspring before full thought is given to the process. Be the company that really thinks about this process, follows the guidelines, and consults with outside help before succeeding the company to an offspring.

In order to maximize the rate of success when succeeding the company to an offspring there are six things you must do:

The owner must complete the Succession Planning Process

Choose one offspring to be the only owner (certain situations were addressed above)

Equal benefits to every offspring.

The owner is independent financially before leaving the company.

A passion and devotion is evident in the offspring.

There is a strong alternative option in place.

By utilizing this process you will significantly increase your chance of achieving desired outcome if there are questions or concerns, give us a call!