Planning to Leave Your Business to the Family

Pancho Duque has built a multi-million dollar sugar and rum empire through his hard work and vision since arriving in the United States from Cuba. However, because of the recurrence of a potentially terminal illness, Pancho must pass on the torch of the family business to one of his children, thus causing rivalries and jealousy to break out among the family.

This is the storyline of CBS's popular series, Cane. It is also similar to the storyline of family businesses throughout the country.

Whether the Duque's business succession is successful will be determined over a number of episodes during the next few years. Whether other family businesses will survive and prosper is dependent upon the planning they do long before the need arises.

Too many times business owners fail to address the issue of succession planning until retirement is imminent. The successful business owners start planning their exit strategy from the beginning and they think of the succession of ownership and management as a process rather than an event.

The importance of early planning cannot be overstated. Only 30 percent of family businesses survive into the second generation and fewer than 15 percent make it to the third. The complexity of business as well as personal and family issues makes this a challenge that must not be left to chance.

Your long term business plan should include provisions outlining how you are going to exit the business. One of the reasons for creating your business should be to build something that you can pass on to family members or sell in the future.

Typically, business succession consists of two elements: the transfer of assets and the transfer of power. Both are important to the success of the process.

You must think of your business as a marketable entity, not just a collection of assets. To truly make it marketable, you must remove "you" from the equation. The business should be structured in such a way that it can run just as smoothly when you are not there. If the success of the business is entirely dependent on your presence, you have created a job for yourself, not a business. And nobody wants to pay good money to acquire a job.

Business succession can take one of two paths. You can sell the business to a third party and eventually pass the wealth received from the sale on to your heirs. Or you can keep both the business and the wealth it creates in the family.

While every situation is different, all exit strategies should have the same four objectives:

1. Determine the successors who will run the business, as well as other key players in its success. Many businesses such as building contractors require either the owner or corporate director to be licensed.

As with the Duque family, success of the transition may be affected by changes in family relationships which could threaten family harmony or disrupt the business planning process.

2. Provide a method of transferring control. This may be an outright purchase or a gradual transfer of ownership. The gradual transfer usually provides a smoother transition as it allows for problems to be addressed and corrected during the process.

3. Ensure the viability of the business by developing management structure and key employees who are willing to participate in the succession plan.

This gets back to removing "you" from the equation. The management structure must enable the business to move through the transition from its operation under you to a set of systems that can operate under the new owner's concepts and interests.

4. Structure the transaction to meet your financial, tax and estate planning needs. Is the transfer of this business going to propel you into retirement? Or is it the means of starting or acquiring a new business? Do you wish to remain an employee receiving a salary and benefits? How will you structure your receipt of the purchase price?

These issues require counsel from your accountant, estate planning attorney and financial advisor.

Business succession planning is a process that must be started before the need for it arises. How well you accomplish this will determine whether you can enjoy your retirement on a tropical beach sipping Duque Premium Rum.

About The Author-- Dean Hanewinckel is an estate planning attorney practicing in Englewood, Florida. For further information you may contact him at dean@dean-law.com. Visit his website at http://www.dean-law.com to receive a free report - "7 Costly Estate Planning Mistakes and How to Avoid Them."

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