Don't put off planning for business transitions The majority of businesses in America are family owned and operated. Yet the average life of a family business is less than 25 years. According to Family Business Magazine, less than 30 percent of family companies survive to the second generation, 10 percent to the third, and a very few survive more than 25 years.
Over the next decade many farms, ranches, and other family businesses will transition to the next generation. So now is the time to plan for this transition, said Jack Davis, area management specialist for South Dakota State University Cooperative Extension.
"Every family and business is unique, yet it is hard to have an unhealthy business and a healthy family or vice versa," Davis said.
"All family business are made up of three unique systems with members of the family and business crossing over and having multiple roles. The three systems are the family system, the business system, and the ownership system. It is important for the family and business to develop a plan for each of these systems."
Listed below are some questions for each system to help start discussion and the planning process. For more information on planning your family business transition, contact your local Extension educator.
The business plan should address the goals of the business as well as the readiness of the successors.
* Does everyone know who the management successors will be and are they ready for new responsibilities?
* Is there a leader in the successor group?
* What business are we in today?
* How are we doing?
* What is different from 5 to 10 years ago? What should be different in the next 5 to 10 years?
* What changes (if any) do we need to make? How can we monitor our results?
* What basic values do we hold collectively as owners and managers? What values do we not unanimously agree upon?
* What do we need to understand from our financial statements?
* What investments does our business need to make for its future?
* What risks should we not take?
* How can we learn from business cycles we've gone through?
The ownership plan resolves issues about the estate, including financial security for a surviving spouse.
* Who will be the future owners of the business? What method or combination of methods will be used to transfer legal ownership to successors? What involvement will withdrawing shareholders have in future decisions?
* When will a transition occur and what will it be contingent upon?
* Is active participation in the business required for ownership? Can nonfamily (key employees) become owners? Can inactive family
members hold ownership?
* Will there be a distinction in voting rights for different owners; i.e., some holding nonvoting stock and others owning voting shares?
* Are there existing shareholder agreements (buy-sell agreements) that influence or restrict the ownership decision? Will these have to be amended? What other problems can be anticipated?
The family plan should look at the future from a collective viewpoint.
* How has our family evolved and changed?
* How have we influenced-and been influenced by-our family business?
* How well do we communicate with one another?
* What are the "family rules" regarding power, authority, decision making, and personal development?
* How are our family boundaries established?
* How does our family respond to crisis?
* Have we grown and adapted as we've aged or do we resist change?
* Are there unresolved conflicts or struggles from previous generations that are passed on to the next generation to resolve?
* Are those who are not currently active in the business allowed to enter? If so, when, and with what experience?
* How does our family view women working in the business? What if daughters are more qualified than sons?
* Is it OK to talk about leaving the business if one of us isn't happy?
* How does our family view the wealth that has been created? What income is needed for withdrawing owners?
* Does the business financially support inactive family members? If so, for how long?