Learning The Ropes Of Family Business Succession
If you market to high-net-worth clients, then you undoubtedly find yourself involved with closely held business owners. I find these the most interesting clients to work with.
Fulfilling the needs of a family-owned business can result in multiple revenue streams for your practice. Alas, at some point, these clients will need to transfer their business interest in order to meet their personal, financial or estate planning goals.
You do not want to lose clients as a result of the business succession, so you should become familiar with the problems and solutions they face. Guiding these clients through the transition allows you to bring greater assets under management and to see increased sales of insurance-based products.
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All in the Family
According to the U.S. Small Business Administration, only 30% of all family businesses succeed to the second generation, and of these, only 15% survive into the third generation. The success of the transfer will depend on your ability to get your client to overcome inertia and to state clearly how their family is to be involved.
Clients need to ask themselves:
- Is the next generation ready to lead?
- Should the business successor be the person best able to run the business or best able to keep peace in the family?
- What roles should children adopt prior to and after transition?
- Should business interests be transferred only to family members involved in the business?
- If so, are other family members going to get equal value out of the estate?
Once the family dynamics are addressed, your client needs to determine the companys value. An accurately appraised value of the business is vital to the clients estate and succession plan.
There are many factors that go into valuing a business, including the negotiated price between a willing buyer and willing seller, comparable sales, multiple of earnings or other formula standards for the particular industry.
Given the magnitude of the transfer and the IRS scrutiny applied to intra-family transfers, I always recommend working with an experienced third-party appraiser who has knowledge of your clients industry.