How to transition your family business to the next generation Featured

9:51pm EDT September 1, 2013
Julianne Cruz,  Managing Director, Advisory Services, CB&T Wealth Management Julianne Cruz, Managing Director, Advisory Services, CB&T Wealth Management

Get personalized advice on how to transition your business to the next generation by contacting Julianne.

Business succession is the one thing many companies fail to address for fear of relinquishing control, a lack of time, the feeling that successors aren’t ready or other reasons. But, it’s never too early to start succession planning. 

“Statistically, roughly only 30 percent of family-owned businesses are effectively transferred to the second generation and just 10 percent make it to the third generation,” says Julianne Cruz, managing director of Advisory Services at CB&T Wealth Management. “There are myriad reasons for this, but one recurring issue is a lack of effective succession planning.”

Smart Business spoke with Cruz about how to effectively position your chosen successors for success.

How should business owners get started?

You need to consider the three ‘T’s of successful transition:

  • Transferring management.
  • Transferring ownership.
  • Tax consequences.

In all cases, having a plan that is strategic and well executed is key, but that takes time. The most successful transition plans take place over a number of years, as successors develop the skill sets required to run the business.

How is management transferred? 

It’s important to select an independent adviser who is highly experienced with planning issues to arrive at the best plan for you and the next generation. 

Some areas to consider are: If more than one child is involved in the business, how will contentious decisions be made once you exit the business? If you want certain key, loyal employees to be cared for, as they are likely necessary for a smooth transition, what assurances do you have this will happen? What happens if unexpected health issues force the transition early? A well-developed plan ensures the business will thrive without interruptions, helps the next generation grow into their role at a reasonable pace and promotes future harmony among family members. 

A short-term plan ensures there’s enough liquidity and insurance to hire necessary experts and avoid a fire sale. A mid-term plan must prepare developing successors or key employees to be in decision-making roles initially. It also would have a timeline for family members to step into their new roles with certain targets. The long-term plan is ultimately what you want to happen — the best of all circumstances.

After discussing your plan with advisers and successors, involve your key employees, who may be more satisfied knowing the company’s future.

What are some factors to consider with transferring ownership?

Once the management transition plan is established, plans for transferring ownership can occur. Usually this begins with your retirement plans. How much income will be needed and what’s the timeline? If you need cash from the business, are you willing to bear the ‘investment risk’ of the business as a source of income once you’re not involved? 

Then, consider estate-planning issues. Are all your children involved in the business? If not, do you desire to ensure each child will ultimately receive an equal estate share?

How do tax consequences factor in?

Taxes are the tertiary consideration once decisions have been made regarding the general retirement and estate plans. As is the case with investment portfolios, taxes should never drive the decision-making process. Tax-reduction strategies should only be considered after other issues are decided.

Business owners in general, and particularly family-business owners, should begin now and get an experienced, independent adviser to guide them through the process. The earlier you plan, the better the results. Sound, experienced advice will make the process that much easier, and maybe even bring family members closer. λ

Julianne Cruz is managing director of Advisory Services at CB&T Wealth Management. Reach her at (310) 258-9301 or julianne.cruz@contangoadvisors.com.

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Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), which operates as CB&T Wealth Management in California. Contango is a registered investment adviser, a nonbank affiliate of California Bank & Trust and a nonbank subsidiary of Zions Bancorporation. Some representatives of CB&T Wealth Management are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. #CCA0813-0090