No matter the level of involvement, it is critical that the previous owner’s new role is clearly defined so they do not overstep any boundaries. They may have one vision of involvement, while the next generation has another, and it is critical that this is outlined and communicated.
This is particularly important for owners of family businesses, who need to think of how they want to offer themselves in support of the next generation of owners while allowing them to rise to the occasion and run the business. As uncomfortable as the thought may be, retiring family business owners should be prepared to hear about the level of involvement – or noninvolvement – the next generation desires. And it seems like these conversations are occurring: Despite the communication barriers discussed earlier, 99% of current owners say they’ve taken at least some steps to prepare the next generation to take over.
Overall, the adjustment can take some time. Ultimately, it comes down to respecting boundaries while being intentional about empowering the next generation and giving them the space to be successful.
Plan for liquidity (depending on your strategy)
There is one significant area where succession to family ownership and a sale of the business diverge: generating liquid wealth. Family businesses that seek to remain as such typically appreciate “patient capital” – meaning that they want family members to hold the majority of shares and continue passing them to future generations – though share redemptions and dividends are often present and important.
Owners who are transitioning ownership to the next generation should assess how much money they will need when they are no longer working. In the partial or full sale of a business, owners of substantial private businesses realize large inflows of liquid wealth in exchange for their shares in the business.
In many cases, these sums of money can be life-altering. As such, it is critical that owners selling a business prepare for an influx of wealth in addition to planning for a shift in their role in a business.
Consider what advice you will need
During a transition, it is important for owners to think about the areas of their post-transition life in which they will need assistance. It may be helpful for owners to have an objective advisor throughout the process of transition to go to for guidance, whether it’s about collaborating with the next generation on a transition plan, navigating conversations with potential buyers, or developing their post-transition personal and financial goals.
Another consideration is tax strategy, especially possible tax benefits. In some cases, those selling a business already have advisors who can be very beneficial for maximizing tax efficiency pre-sale. For those who do not, interviewing and hiring one can help you manage your liquid wealth or help with any tax implications that may emerge when transferring the business to the next generation.
More sophisticated advisors can also partner with owners on:
Owners can assess all of the areas of need and determine where they are comfortable managing the process themselves vs. relying on others. Underlying this decision should be the core values of the owner, family, and business. Owners should think about what role they would like their wealth to play in their life, including that of their family, and make sure they make decisions around who to hire and how to manage their liquidity and future in alignment with their vision and values.
Brace yourself for change
Today, most information, including estimates of a person’s net worth and the sale price of a private business, is one click away. The specifics around the cash proceeds of a business sale, from what was previously illiquid ownership value, can become public.