How To Prepare Your Business To Be Passed Down To Your Kids
Sarah Nicole Nadler
As a family-owned and run business, you take pride in the way your blood, sweat & tears have built a reliable income source for your entire family.
But...it's also a huge responsibility, and that's why so many business owners are concerned about what will happen to their business when they retire, exit, or pass away.
This week on The Six Figure Biz ShowI'm sharing with you the best tips & tools you need to plan your Business Succession so your family, employees and clients will be taken care of when you're gone.
So, as always, let’s pull this problem apart.
Planning Your Exit From Business - Episode 61
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Preparing To Retire In A Family-Owned Business
If you are like most family-owned businesses, your family relies on your income. And so in order to be truly financially responsible, you have to have a plan in place for your exit, as well as in case something happens to you.
If your plan is to pass the business on to your kids, then here are some tips on where to start. In this article, I will cover:
Diagrams of The Business Channels & Flows
Documenting Systems & Processes
Financing The Transition
Key Person Insurance
Should You Have A Living Trust?
Structuring The Transition
Things To Consider When Transitioning Or Retiring From A Family-Owned Business
Tip #1: Bring Your Child On As A Partner
The first retirement strategy you should consider is to bring your child on a partner with the intention of eventually selling to them (or leaving them the business in your will).
This allows you to really ensure your clients will be served the way you treated them, and give your child the maximum potential for success at the wheel of this venture, as you will be training your replacement and documenting precisely how things are run as part of the transition.
Doing so provides two possible retirement plans for you as the parent:
1) Your child may take out a loan and buy you out with one lump sum, allowing you to purchase an annuity to fund your retirement plan.
2) Or your child and you may choose to enter into a contractual agreement whereby the buy-out process extends years or even decades, which provides you with a potential for continuous income in retirement.
Check out episode 49 where Ben Nadler explains how to turn either the lump sum or the long-term contract into a retirement plan.
Retain some rights. You can structure a deal that transfers your business to your child and generates liquidity for you, but allows you to remain involved and still active in the business if you so choose.
Train your replacement. Ensure your clients will be served the way you treated them.
Requires a highly-trained business owner. You must be capable of teaching your child how to be successful in the business.
If you have more than one potential benefactor with interest in the family business (such as a spouse, ex-, or multiple children) things can get a bit more complicated. Feelings can get hurt when you are forced to make a choice between family members.
If you plan to retire and sell the business for a lump sum to fund retirement, it might make more sense to sell to a competitor, if your children are not in a position to purchase the company on their own.
This can also be a good option for an estate plan. It is a lot easier to split a lump sum from the sale amongst beneficiaries than it is to split a business!
However, if several of your children, or your spouse, work for the family business, it might make sense to create a living trust who will manage your affairs when you pass.
A living trust is a legal document that lets you distribute your possessions to people and organizations after you die. A living trust “owns” the property you put into it, while still allowing you to maintain control.
The advantage to a living trust over a will, is that your will must pass through probate before it can be enacted. To probate a will, the document is filed with the court, and a personal representative is appointed to gather your assets and take care of any outstanding debts or taxes.
Steps to Prepare The Business
Whether you plan to sell the business, bring your child on as a partner, or continue working at a reduced schedule, there are certain actions you can take to maximize the profitability and value of your company.
Documenting your processes is an important step to ensure the survival of your company culture as well as the revenue it brings.
Consider writing company policies that outline not only what you do and how you do it, but why it is done that way. This will help your child gain a sense of good judgement and the ability to make decisions that improve the business's survival.
Job descriptions can be created, improving the efficiency of team onboarding and training, and eliminating a great deal of the disciplinary problems most new business owners struggle with.
But you can also make these yourself, with a little thoughtfulness and some extra time. I promise the time spent will be paid for in an improved efficiency by having a fully-trained team!
Each job description should include:
Purpose. What is the reason that role exists in the company, and how does it effect the overall performance of the team as a whole.
End Result. What is the transformation (of goods or services) that this role is supposed to perform? If they are a teacher, the end result should be "literate students". For a baker: "delicious and nutritious baked goods". Without a clear end result, we often end up with "busy" employees who produce nothing of value for the company.
Metrics. What measurable instrument can you use to see at a glance whether this employee is pulling their weight...or not?
You may also consider adding a diagram or sketch of the systems and channels along which communication flows from one section of the company to another.
How To Create A Written Exit Plan For Your Business
There are so many factors that come into play when you don't have a written plan of how your business will be dealt with in the event that you become ill or incapacitated or pass away.
We really need to take responsibility for this as business owners and make sure we have this plan together from day one. Don't wait until your first first health scare, alright?
Don't wait until you start looking at retirement.
You should have your exit from business planned out the day you start your business, or the day you quit your 9-5 if you're scaling a side hustle.
Your written exit plan should outline what you want done with the business, name who will have the rights to what part of it, and a buy/sell agreement or living trust should be in place to keep your succession plan legally binding.
Of course, funding the buy/sell agreement is a major part of your business exit plan, and that is something I can help you figure out.
I hope you found this episode helpful!
Once you are ready to put a succession plan in place, you will need a licensed financial advisor to help you design the best written plan for you, your family & your business.
Sarah Nicole Nadler is an investor and licensed financial advisor on a mission to help Americans stop trading time for money. When she’s not serving her clients, she geeks out on board games, writes fantasy novels, and explores the great outdoors with her husband Ben.