9 tips for passing down your business to the next generation
Consider these strategies for passing down your business to family members. An advisor can help you create a business succession plan.
CIBC Private Wealth
May. 01, 2024
6-minute read
So, you've decided to keep your business within the family. Succession planning is an essential component of protecting the continuity of your business. If done right, it can also support the success and harmony of your family's long-term well-being.
CIBC's Director of Wealth Strategies, Susan Wood explains, “Business transition planning provides answers to critical questions about how your business will transition when the current management and owners are no longer there.”
Here are 9 tips to help you prepare to pass down your business.
1. Start with a conversation
“Begin by opening a dialogue with all key stakeholders, including your family and potentially the leadership team within the business, to get their input and feedback,” Ms. Wood suggests. Talk to your family and other key stakeholders about their future involvement in the family business.
If your children want to be involved, how do they want to participate? Do they want to take on a management position or an ownership role?
If they're not interested, you may have to consider other options for leadership and ownership transition, such as current managers or employees, or potentially third parties.
2. Identify and develop future leaders
“Business transition planning involves deciding how management or leadership of the business will be transitioned, and how ownership will transition,” Ms. Wood explains.
When considering candidates for leadership positions, whether they're your children or someone else, you may want to assess if they're ready. Do they have the skills, competencies and commitment necessary to lead the business? Or do you need to provide training and mentorship opportunities to help them build their capabilities? Those with blended families may want to consider stepchildren to potentially fill roles in the future of their business.
A key consideration is developing a good understanding of what the business needs from its next leaders, which may be different from the skills offered by the current generation.
Additionally, business owners may find it difficult to be objective in assessing what each of their children brings to the table. Sometimes it can help to engage outside consultants to work through this.
Once you've started to think about who will take over your business and what that might entail, create a succession plan.
“In some cases, leadership and ownership will transition to the same person, but not always,” Ms. Wood tells us. There are different options that can be considered.
Owner-manager model
The business leadership and ownership is transitioned to one or more children. The family believes that to be an owner, you must work in the business.
Owner-investor model
Ownership of the business is transitioned to the children, but they do not take an active leadership or management role in the business. Rather, they hire external managers to run the company.
Hybrid model
Ownership is transitioned to a mix of children, one or more of whom work in the business and others who do not. The ownership could also include non-family members.
4. Assemble a team of multidisciplinary advisors
A multidisciplinary team of collaborative experts can contribute to the success of your business transition.
Your team might include lawyers, family enterprise specialists, accountants, tax specialists, bank managers and financial advisors. Get advice you can count on from professionals to help you make important decisions about your succession plan.
5. Consider your financial needs
Even if you're not ready to retire, you can start thinking about what your financial needs might look like in retirement.
“If you need to continue drawing a salary or dividends to sustain your needs in retirement, can the business financially support you and your child or children that are stepping into a leadership role?” Ms. Wood asks. It’s important to be realistic about how many family members your business can continue to financially support. In some cases, a business owner’s ongoing need for cash flow from the business to fund their retirement can influence or potentially limit their succession planning choices, making it an important consideration.
6. Keep estate planning in mind
When creating your succession plan, don’t forget about broader estate planning. Make sure you have a legally binding will and a power of attorney for property. If you have children who won’t be involved as owners in the business, think about any other assets you may want to gift to them as a form of equalization, if that is important to you.
Revisit all these documents regularly and confirm whether they accurately reflect your current wishes regarding transition of ownership of your business and other assets.
7. Address emotional aspects
“Business succession planning can be challenging for many reasons, some of which are emotional,” Ms. Wood explains.
Succession planning has the potential to create family conflict if people have different expectations or feel they aren't being treated fairly. Luckily, you can avoid these issues by starting succession planning early and having ongoing conversations.
You might also feel strong emotions about transitioning your business if you don't feel ready to retire or you're struggling with how to let go. Finding something else that you're passionate about can help give you a new sense of purpose and enjoyment. This can often contribute to a successful business transition by making it easier to let go, and giving the next generation the room they need to take the reins.
8. Revisit your plan often
The first draft of your transition plan will likely not be the last. Succession planning is not a one-time event. It requires regular review and updates as circumstances change and evolve.
9. It's never too early to start
Many people avoid succession planning or simply don't think about it until it's time to retire. Other people are forced to think about it when they encounter a situation in life, such as illness, that requires them to step away unexpectedly.
Early planning can act as a risk mitigation strategy and help reduce the stress that comes with transitioning a business by providing you and your family with peace of mind.
At CIBC Private Wealth, we take a comprehensive approach to managing, building and protecting your wealth. If you'd like to discuss these insights in more detail or have questions about your investment portfolio, get in touch with your advisor anytime.
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