According to Inc. magazine, approximately 30 percent of America’s family owned businesses are sold or transferred to the next generation. Outside parties buy the remainder, sometimes for parts or pennies on the dollar. While the person who builds a business might make a significant income from the operation during his or her life, a business owner’s death, disability or retirement can cause the company to close.
That, of course, is unnecessary. If business owners take the time to plan for what could happen to their business, then they can turn it into an asset that nets value for generations to come. I see this situation almost weekly. For example, a business owner who I’ll call “Mike” ran a small business employing 14 people. One of his employees was his son-in-law. Those fourteen people had spouses; some of the couples had children.
When I met Mike, he was in his late 60s. He suffers from two diseases, either of which could be terminal. While both diseases are currently in abeyance, Mike’s situation could change quickly.
“What would happen to your business if you died?” I asked. “The business would shut down,” Mike said. “My son-in-law is in his 40s, and he would be forced to find a job somewhere else.”
If Mike had died, his business risked being sold for maybe 10 cents on the dollar. His competitors would have snatched up his customers. Mike’s wife and kids would get very little in return for Mike’s hard work. And his son-in-law and the other employees and their families would be out of work.
Mike hadn’t taken the time to think about alternatives. So, we researched Mike’s situation. By designing a new succession plan for Mike, we made sure Mike’s business would go to his son-in-law upon Mike’s death. As part of the plan, Mike’s son-in-law would pay Mike’s wife an income over a specified period of time from the business. Mike’s wife received value from the company, his son-in-law inherited the business and the employees and their families kept their income intact.
Business owners become entangled with the day-to-day operation of their companies. And that’s often why they never think long-term. But long-term thinking can be the difference between a company that lasts one generation and a business that lasts multiple generations.
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