Can the next generation run your business?

Keeping the business in the family or among trusted employees is a point of pride for many business owners. And some heirs apparent truly can’t wait to run the business. Today, we’ll raise some important considerations if you intend to keep the business in the hands of insiders.

Does an Insider Transfer Lead to Financial Independence? 

Even if you intend to sell to someone you know and trust, it’s crucial that this strategy still allows you to achieve financial independence.

It can be tempting to want to offer a “friends and family discount”. While you don’t necessarily need to squeeze every last dime out of your next-generation owner, for your sake, their sake, and the business’ sake, financial independence must be your North Star.

If you cannot find a path to financial independence by selling to an insider, you may need to dedicate more time and resources to training the insiders to allow you to achieve your financial goals.

Keep in mind that your insider may not be able to pay you the money you need to achieve financial independence outright. That isn’t necessarily a deal breaker. However, you must establish a clear path to financial independence before handing the reins over entirely.

There are many different ways to achieve this goal successfully. Your Advisor Team can help you map out strategies that position you to transfer the business to your chosen insider while achieving financial independence.

Does Your Insider Want Ownership? 

Transferring ownership is a two-way street. Just because you think an insider would make a great successor doesn’t mean they want to be a business owner.

This is a common trap owners fall into when they have excellent key employees. Key employees are those who have a tangible effect on the company’s success and whose absence would harm the company directly. Owners may assume that because key employees excel in their area of expertise, they might also want the added challenge of ownership.

However, some great employees are happy being great employees. They may have no desire for ownership.

It can be a similar story with children. Whether they’re active in the business or not, children may feel a sense of obligation to run the business, even if their hearts aren’t fully in it. The fear of disappointing a business-owning parent can create situations that aren’t ideal for implementing plans for a successful future.

So, before you choose a successor, it’s smart to get a sense for whether your potential successor wants to be an owner. You can look for signs, such as taking on added responsibilities that align with ownership responsibilities, or you can even flat-out ask them if they are interested in ownership.

Is Your Insider Capable? 

Whether your insider is your child, a high-performing employee, or another talented insider, it’s crucial to determine whether they’re cut out for ownership.

Successful owners understand how much time and dedication go into their success. Not all people have the willingness to dedicate to ownership. Plus, good business owners make it look easy. This confluence is a common source of “the entitled child who buried the successful business” cliche.

On the other hand, not all high performers have transferable skills to make them good owners. For instance, exceptional individual contributors, like star salespeople, may not have the patience or desire to learn how to manage the many moving parts of a successful business.

This is an important and difficult question for many business owners to consider. Sometimes, business owners ask it far too late in the process.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

Please feel free to contact a member of our advisor team to begin a conversation today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need. This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest. Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Copyright © 2023 Business Enterprise Institute, Inc. All rights reserved.



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