Columnists Bob Epstein Plan ahead so the family business will be a gift, not a burden, to heirs and successors

Plan ahead so the family business will be a gift, not a burden, to heirs and successors

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Approximately 92 percent of all jewelry stores are independently owned. Unlike many retail industries, family owned businesses are a very common form of ownership in the jewelry industry. Successful family businesses tend to resemble fireflies. They flicker brightly for a brief moment and then die away.

A recent Grant Thornton research study found that 70 percent of family businesses never make it to the second generation. 90 percent never make it to the third generation. A precious few family businesses, though, do manage to beat the odds. They are passed down, revived, and reinvented from generation to generation, while all the others have long since gone bust, been bought, or just slowly faded away, done in by family feuds, hard times, or changing tastes.

So why do some family owned businesses thrive while others fail? Successful family businesses all have one thing in common - a succession plan. A plan of succession should be created years in advance of a transition, and this plan should include the following:

  • How should the business be structured?
  • Will someone within the family take over?
  • How is the company going to be valued?
  • Are there key employees who are not family members who need to be included in the long term plan?
  • How can you continue to receive income during your retirement?
  • If there are children who are not interested in the business, how do you create a structure that is fair to them?

Your financial advisors, attorneys and accountants should be consulted when creating the plan. They can be instrumental in offering advice on how to structure the business to better manage tax issues that will arise upon transition. They may also suggest buying life insurance policies to help fund the stock ownership transfer. You may even want to consider creating an advisory board made up of qualified professionals to help transfer ownership and to deal with the tough issues.

When it comes to deciding who will take over the business, it’s essential to ensure that your children are qualified to run the business. Have your children been involved in the business or in one that is similar? If the children are going to take over, urge them to work at least two years in the business. If the children will be taking over the business, will it be one child or two or three children? If only one child is interested but you want to be fair to the other children, an attorney can help create an estate plan or will to deal with these issues. If the children are not qualified to take over the business, then you may want to consider key managers who have been with the business, or a third party sale of the business.

You also should address how the business will be valued upon your retirement. You may have a different structure depending upon whether the business is going to be taken over by family members or sold to a third party. If the children do not have capital to fund your retirement you may want to consider conducting a retirement sale to generate enough capital to fund your retirement. You may decide to continue working part time, get paid as a consultant on an ongoing basis, or create a stock buyout plan where you get paid over a period of time.

It is important to plan for the additional capital requirements that will be necessary to pay for the transition costs, including taxes, professional fees and stock purchases. A general rule of thumb is that a business must grow about 20 percent more than the normal growth rate to offset the costs of business succession. Ever critical, however, is not to disrupt the profitability and cash flow of the business. Passing on a profitable business to your loved ones or other worthwhile successor is a tremendous gift, if you follow a few simple rules of good business planning.

Bob Epstein is CEO of Silverman Consultants, LLC. Offering a legacy in sales strategies for jewelers since 1945, Silverman Consultants provides guidance to store owners seeking to turn around a business, sell off unwanted inventory, or liquidate an entire store. With offices located in Charleston, South Carolina; New York, New York; and Saskatoon, Canada; the company helps jewelry store owners and chains formulate strategies designed to maximize revenue in times of transition, whether due to retirement, store closing, or simply when needing a boost in sales. For more information, visit www.silvermanconsultants.com or call Bob direct at 800-347-1500.

 
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