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Business owners invest significant amounts of time and financial resources to make their enterprises successful. Quite often, due to the quick pace of day-to-day operations, planning for succession of ownership is relegated to a low-priority task. But there comes a point in the lifecycle of any business when the owner is no longer able to manage the firm that he or she founded.
Because the timing of death or disability is difficult to predict, it’s prudent to have a succession plan in place now to safeguard your family’s financial well being, and to provide your business with leadership during a transition period.
One logical solution—and one that most entrepreneurs may want to choose—is to turn the reins over to their children. However, despite its emotional and intuitive appeal, the odds are stacked squarely against a business surviving a transfer down the bloodline.
According to a 2019 study by PricewaterhouseCoopers, two-thirds of family-run enterprises fail to make the successful transition to a second generation of ownership, and approximately 12% survive into the third generation. Making a successful transition even trickier are issues brought on by divorce, blended families, or rivalries among children.
The best course of action may be either to identify strong candidates within your company who can continue to run the business and provide a source of financial security for your family, or to look at the potential for selling the business to an outside party.
Whichever course you eventually decide is right for your business, there are steps you can take now that will ease the transition.
Proceeds from a life insurance policy are frequently used as a way to fund a buy-sell arrangement. Other options include loans from a bank or company earnings that are paid back through an ‘earn-out’ arrangement with your successor, whereby the loan is paid back in regular installments.
Planning for succession can be an unpleasant task, although the outcome can be even more unpleasant if you fail to plan. You’ll have a lot more options if you start to plan when things are going great. What you don’t want is a situation where your family is scrambling to salvage some value from the business after you’re gone.