Photo by Tim Mossholder on Unsplash
Aside from a sense of pride and accomplishment, a family business creates an assurance that some family member will eventually step up to continue the business when its current leader will no longer have the capacity to do so.
As a family business owner, regardless if you see yourself retiring shortly or not, it is important to prepare for the future of your company through legacy planning. Because even if you see yourself leading your family business for a long time, unexpected events may occur.
Without a business succession plan, the company may be left to incompetent or inexperienced hands, which could be harmful to the survival of the business. Therefore, talent management and succession planning should be given proper consideration and action in coming up with the best legacy plan for your business. Because the sooner you have a business succession plan in place, the better prepared your family business becomes.
Why is legacy planning important? Here are 4 reasons why you should consider family business succession planning:
1. A business succession plan allows you to review the options for your successor
As the business owner and manager, the biggest decision you may face is selecting who will eventually replace you.
Most often, when a first-generation business owner starts to consider their choices, they forget that the role of owner and manager can be fulfilled by more than one person. Bear in mind that although you want your family members to profit from your business, they may not have the skill sets to become good managers.
Once you have selected your potential successor, you can also invest in training programs to ensure that they are equipped with proper knowledge of the business.
2. Family business succession planning provides a venue for conversation about the future of the family business
Succession planning allows family members and concerned parties to talk openly about their plans and expectations. Through this process, you can also evaluate what worked well for the business in the past, aside from what an ideal future would look like.
With the changes in the business market environment and personal relationships among family members, it is best to come to an agreement as to how procedures will be done when a new generation of leaders step up to the plate.
These can include new policies in decision-making, business operations, distribution of profits, or even processes in cases of disputes among members.
3. Succession planning allows you to select the proper succession vehicles for your family business
In discussing the future through family business succession planning, you can choose how the company will be passed on when the time comes. Here are two vehicles you can consider:
Buy-Sell Agreement
In the event of death or disability, this agreement will set forth a requirement for the remaining business owners to purchase the interest of the departing owner.
Manager-Managed Business
In this setup, you can appoint a manager to oversee the operations of the family business. This person may or may not have ownership interests, but what matters is that their resignation or replacement will not affect the ownership of the business.
4. A business succession plan helps you prepare for estate and gift taxes
The transfer of business ownership has tax implications, which can be calculated when you prepare your business succession plan. To decrease the potential impact of estate taxes on your surviving family members, you have the alternative to slowly transfer your interests to your loved ones during your lifetime.
Clearly, there are many ways of ensuring that your legacy lives on after your death. A family business is a legacy all on its own, so it is important to understand what is business succession planning.
With its income-generating functions, a family business is a valuable asset you can pass on to your loved ones. To ensure its continued existence, a business succession plan must be in place.
If you are considering other ways to leave a lasting legacy, you can also look into what is legacy giving and what is mental capacity.
As experts in family business succession planning and exit planning, we at Kith & Kin Law Corporation can help you draft your business succession plan for your family business.
Send us a message so we can discuss further.
