Keeping Your Business in the Family

Is your company ready to support the legacy you envision?

The married owners of a construction-related company in the Midwest saw their business as more than a financial enterprise. It was a chance to leave a positive mark on the community and a financial legacy for their family for generations to come.

Yet, like many owners, they found the reality to be much more complex and challenging than the dream. They’re not alone. A little more than 30% of family businesses survive to a second generation, and 12% make it to a third. By the fourth generation, 97% are out of business^†.

In this case, the owners died before a transfer could be finalized. Because the business came to the children as part of the owners’ taxable estate, the heirs had to borrow money against the business to pay those taxes, significantly diminishing its value.

Without clear plans to follow, the children fought bitterly over finances, the company was drastically diminished, and the owners’ highest hopes for their legacy went unrealized.

Despite such high stakes (or, perhaps, because of them) many owners put off detailed transfer discussions. According to the 2019 U.S. Family Business Survey , just 18% of family-owned businesses surveyed have a formal succession plan^‡.

"The more planning that's done, the greater the number of options an owner will have,"^§ explains Dan Griffith, senior vice president and director of wealth strategy at Huntington Private Bank^®. "Without planning, the options that are typically left over may not be what they want."

Nearly 70% of family-owned businesses fail or are sold externally before the next generation can take over^¶. A detailed, careful succession plan can make a big difference in the outcome. It starts with taking time—a valuable rarity in the life of any business owner—to come up with a plan that works for you.

Consider your goals

Griffith, who has worked with business owners for more than 20 years, says a good place to start is with the desired outcome. “What is the ideal situation after they exit? Once we start with the end result, we can work our way backwards.”

Start with broad strokes—where do you want to live? How much (if any) involvement with the business do you want to have? What are your other goals?

Use your answers as a means to address more specific issues, such as how much of the business’ value you may want to extract to finance the next phase of your life, and how the actual transition will happen.

What are your family's goals?

“You may have some children that work in the business, some that don’t, other family members that have been associated with the business,” Griffith says. “How do you compensate everybody fairly? As with any family, things are all simple until they’re not.”

Family considerations begin with clear communication, earlier rather than later, he notes. This can help minimize hurt feelings and family ruptures. (Ask your Huntington Private Bank advisor for ideas and resources to help you have that conversation.)

Finding a successor

Whether it’s one of your children, an experienced employee, or someone you recruit from outside, finding the right person to manage the business and transferring leadership are essential aspects of transitioning ownership, which ideally should be a gradual process.

With poor transitions, performance of direct reports is 15% lower than it would be with high-performing leaders, and those direct reports are 20% more likely to be disengaged or to leave the organization^#. Part of this is clarifying what you, the owner, bring to the business.

For example, if client and vendor relations are vital to your success, make sure any prospective successor has the time and access necessary to form their own relationships with these key contacts.

Structuring a transfer

Exactly how you transition your business will depend on numerous factors. “Basically, your options involve a sale for the interested party, or a gift,” Griffith says.

With a family sale, the buyer, perhaps a son or daughter, will typically take a loan from a third party. They will then use the business’ assets or stream of income to repay that loan. If the transfer is in the form of a gift, the options are to gift it during the owner’s lifetime or afterwards, through a bequest.

Selling or gifting the business will have varying tax consequences that you’ll need to consider^‖. “A sale could be structured in installments, where capital gain taxes are recognized over a period of time. It may be owner-financed, or it could be some sort of recapitalization,” Griffith says.

Handing the business down as a gift during your lifetime means that you, as the owner, can likely retain control while removing the business from your estate, potentially limiting taxes on your estate. “

That way, the equity of that asset is slowly accumulating to the transferee,” Griffith notes. There are also charitable strategies that allow you to transfer the asset in a way that serves your goals, the charity’s goals, and your family’s goals.

Compensation—for you and your employees

Removing liquidity for your own future will likely play a central role in your succession plan, depending on your financial circumstances and your plans for your next adventure. But estimating your future needs can be a challenge. No matter how successful your business has been, these questions must be addressed so the owner can make a viable plan, Griffith says.

You’ll also want to consider how a transfer will affect employees. With any transition, you risk losing long-term employees, he says. You might consider working safeguards into the transition plan.

Griffith notes, “It’s really up to the owners: Should there be contracts offering guaranteed employment after the transition, or some sort of bonus program to help compensate them if they end up not liking the job after the transition and leaving?”