What follows is general information, not specific legal or financial advice for shop owners planning to hand over the reins to their family. Laws vary by state; consult local experts before making final decisions.
Three phases are common to the successful transition of a family-owned business:
- The right elements must be in place for several years prior to the decision to buy or sell. Business experience for the potential buyer and motivation for the potential seller are key before planning a succession. It’s important to learn how others conduct business in order to bring back new ideas to the family business. The influx of new ideas is just part of the equation; the younger generation must decide whether they really want to take over and are prepared for the responsibility and risk of ownership. The older generation should also be psychologically ready to consider a succession.
- The key players must be emotionally and mentally prepared for the transition period. The younger generation should be given an opportunity to actually run the business, but being left alone in the business without the years of experience of the past owner poses a risk. The seller also should be prepared for that risk to include some relative financial hardship early on.
- A viable plan must be devised with the help of legal and financial experts, and then actually followed. With the foundation properly laid and both parties ready to make the transition, the financial and legal details of a succession should be worked out with expert legal and financial counsel. The valuation of the business, the involvement of the older generation after the sale, the financial impact on non-involved heirs, and the method of payment by the buyer must be considered. Oftentimes, the business is the most valuable asset of the older generation; the equity they’ve built up in it over the years must be recouped through its sale. With expenses in retirement largely unknown, a seller may want to retain at least a part-time role (with possible healthcare benefits) to meet costs of living. For an in-family sale, equitable treatment of non-involved children also is necessary.