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Early and frank talks are vital in family business transition

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According to Forbes magazine, 90 percent of businesses are owned or controlled by families.

Less than a third of family businesses survive the transition from first- to second-generation ownership, Forbes said, and another 50 percent don’t survive the transition from second to third generation.

Think about the personal and financial ramifications of those statistics. It seems as if many failed businesses could have been saved with proper planning.

Small-business owners want to keep their business in the family. So, think early about practical considerations that can assist with the business.

One disadvantage of a family business is the emotional impact, which is nearly unavoidable.

Children almost always are different than their parents. They do some things better, some worse.

Transferring and growing a business from one generation to the next poses huge challenges, as evidenced by the statistics noted.

Your goal should be to increase your odds of success. Spotting the issues and communicating openly are vital.

If you have business advisers (attorney, accountant, financial), they can best serve you in helping to understand what can go wrong and how to plan many years ahead. That’s what makes their experience so important.

<What if family members are not suited for the business?

Business owners’ objectivity can be their worst enemy. So often, children’s skill sets and talents are not as strong as their parents believe them to be.

Playing “devil’s advocate” and asking difficult question can be very helpful in planning the transition ahead of time.

Owners need to understand the importance of business acumen, and children need to understand they will have to continuously reinvent the business.

There are even examples that children are paid a salary to stay away from the family business.

<Interested third parties

Many business owners have a “right-hand man” to rely on to help run the business.

Especially during the early stages of succession, these people can be invaluable as trainers and mentors. They can bridge the communication gap between parents and children, improving communications.

Repeatedly, this reduces the emotions among family members.

Up front and open communication between all parties is essential. The third party needs assurance of job security and the ultimate goals, while the younger generation needs to learn the business, preferably from the ground up.

Hopefully, this allows the successor to learn the ropes, in the hopes of preventing major problems before they occur.

<What if only one of the kids works in

the business?

With very few exceptions, parents want to treat their children equally. If they give one child $50, they feel an obligation to give all of the kids $50.

How does this work with business succession? The answer: every family is different.

Some children buy the business at fair market value, while others pay with “sweat equity.”

Theoretically, if the business is purchased, the money stays in the older generation. Then, it ultimately passes to all the children equally.

Likewise, one of the children significantly enhances the business, which benefits the parents and, ultimately, their children beneficiaries.

This is an extremely personal matter for business owners, yet equally important. Once again, have upfront dialogue with the entire family to avoid hard feelings and unwelcome surprises.

In most cases, all of the children will benefit if the business flourishes.

<

Money is never a good reason to break up the family. Again, discussions up front and even creating the necessary documents and executing them increase the chance of success.

If you tackle your business succession problems early and work with external professionals, implementing solutions will make more sense and increase the probability of success.

You just need to go about it in a logical and frank manner. The easy decision or discussion rarely is the most valuable.

Paul Marrella is a wealth manager at Marrella Financial Group LLC in Wyomissing, public speaker and author of “What Now? The Widow’s Guide to Financial Independence.” He focuses on providing wealth management and retirement income solutions to successful families in southeastern Pennsylvania and can be reached at www.marrella.com or 610-655-9700.

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Write to the Editorial Department at editorial@lvb.com

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