When your time at the business you created draws close, it’s essential to start creating a plan for the future. From an open market sale to family succession, there are many options for all owners.
Handing your business down to a family member is a proud moment.
You’ve built your company for years, and passing the baton to a loved one will continue your legacy. But, a business transfer needs careful planning. You need to ensure the business can thrive after you leave.
Balancing the company and your family can be challenging. However, this balance is achievable with careful planning.
We’re Uscita, a team of experienced business brokers from Cheshire, UK. Our expertise lies in engineering, B2B, and manufacturing businesses. We’re here to guide you to a successful business exit with free valuations, exit planning, and honest selling. With experience in the business sale field since 2005, we know the components to a satisfying sale.
Are you ready to transfer your business to a family member? In this article, we’re exploring everything you need to know when stepping back. From the reasons for a transfer to minimising risk, we’re here to guide you.
Keep reading to find out more.
When Is It Time For An Exit/Transfer
Knowing when to step back from your business is the first step to a family transfer.
Business owners all have unique reasons for winding down. For some, it’s time to retire. In contrast, for others, an exit is more urgent. Take time to stop and consider why you feel it’s time to leave. Do you want to reduce your stake in the business to pursue personal ventures? Or are you feeling like you need to rush out of the business due to factors beyond your control?
Your reason for leaving will affect your business exit plan. It’s important that you’re leaving for pull factors rather than push factors. Taking time to think about your exit will give you a better plan for the future.
Pull factors include wanting to spend time with family or to travel the world. Some owners may want to invest time in other projects. These are positive reasons for leaving, and they add little time pressure to the process.
Push factors put pressure on the exit process. These may include a sale for financial reasons or health-related factors. Though these factors are part of life, they can lead to a rushed sale and a difficult takeover. If these issues are present, you may need professional guidance. Business brokers, like Uscita, are here to help in these cases.
Regardless of your personal reasons for an exit, it’s crucial that you plan ahead. The more time you have before your exit date, the better.
If you haven’t already, start planning now for a smooth family transition.
Reasons to transfer a business to a family member
So, why should you consider transferring your business to a family member?
Handing your business down to a loved one can be beneficial for many reasons. If your family members are part of the same industry, they’ll have the right expertise. Often, they may already be working for you. This means you won’t have to re-train or educate a successor. Plus, they’ll likely know the inner workings of your company.
A family successor is also more likely to keep the company’s culture the same. Working culture is more important than many realise. If a new buyer takes control and makes major changes, you can end up with unhappy suppliers and employees.
A family transfer can also remove the expense and disruption of an open market sale. Though a transfer is still classified as a sale, the change of ownership stays within your family. This can reduce the stress and challenges of finding a new owner.
Of course, no transfer or sale will be without issues. But, in general, a family transfer comes with a host of benefits for the future of your business.
Potential issues with a family business transfer and how to avoid them
When planning for a family transfer, you’ll want to identify and remove issues upfront. It’s best to take an honest look at problems. This will help you navigate them for a more successful business exit.
A common issue when transferring a business to a family member is a strain on your family finances. Having all family investments in one company can be difficult. If your business is thriving, this is fine. But, if there are financial issues, it will affect all your family’s finances. Explore potential scenarios to make sure you can protect your family. This is where the support of a business broker with experience in your location and sector can be invaluable.
Additionally, a family successor could limit future growth. Future expansion is often determined by family culture. This isn’t the case every time, and it’s essential to ensure an external viewpoint isn’t lost. Remember to keep your business open to outside advice and growth.
Another issue to consider is the potential for family disagreements. No one enjoys thinking about this scenario. Yet, working together can cause tension when disagreements arise. How does your successor work? Do you agree with their style? If not, they might not be the right candidate for the job.
When handing your company to a successor, communication must be crystal clear. Ensure your successor doesn’t feel pressured into the role. While there’s honour in taking on a family business, the successor must want it. If they’re not 100% sure, allow them the chance to say no. This will benefit your business in the long run.
Though these potential issues aren’t pleasant, you should explore them. Considering all routes leaves you in better stead for a fulfilling exit.
How to start the business transfer to a family member
If you’ve taken the time to review reasons for leaving, benefits, and issues, it’s time to put a plan together. A well-thought-out plan is key to future growth in all business exit scenarios.
The first step for a transfer is to choose your successor. Once you’ve chosen, there are several steps to take to set your family up for success.
When starting the transfer, you have three main options. These include a sale, a partial sale, or a gift. Each comes with individual benefits and tax factors. To understand what’s best suited to you, consider consulting outside help. A commercial or tax accountant can help you assess each outcome before you decide. If you’re already working with a business broker, they can recommend an accountant best suited to your business.
You should also explore what your personal retirement income needs are. It’s easy to focus on your successor, but you should also ensure your future finances are secure too. Include these needs in the business sale plan to protect yourself.
Another initial step to take is mapping out the key strengths and duties of your role. This will provide a template for your successor. If there are no clear expectations for the new owner, it could lead to the company taking a wrong turn. Even if your successor knows the company well, having expectations can reduce conflict.
Finally, when starting the business transfer, ensure you value your business. This is common in all business exits and helps you achieve a high-value sale. Remember, a transfer to a family member is still technically a sale, so plan accordingly. Uscita offers free business valuations to help business brokers plan for the future. Achieve the value you’ve built over your time with the company.
How to choose a handover date when transferring your business to a family member
Once all the initial transfer details are complete, it’s time to work out your final handover date. When the handover date is set, it’s time to put your business exit plan in motion. This is a bittersweet period, but there are more important steps to remember.
During your final months at the business, encourage your successor to work with you. Even if your family member is already an employee, encourage them to shadow you. This will give them insight into the day-to-day role. You want them to know as much as possible before you leave. If they have to keep checking back with you on how things are done after the sale goes through, not only are you still involved, but it undermines their authority as the new owner.
Besides working alongside you, prepare extra information about your role. Round up all necessary accounts and lease agreements to make important information clear. At this point, you can start introducing your successor to key clients and suppliers too.
The goal is to treat these final few months as a training period. Ask your successor if there’s anything they need to know and cover all bases.
When you’re getting closer to the transfer date, slowly reduce your hours. You can also reduce your responsibilities. This way, you can examine your successor taking the lead and offer guidance if needed. A gradual changeover reduces any large changes, leaving employees in a stable environment.
How to minimise risks during a family transfer of a business
Risk is present in every business exit. Yet, there are multiple steps you can take to reduce any adverse effects on your business.
When you step down from your role, you need to leave a solid plan for the future. A business plan guides the new owner and ensures your business will thrive after your exit. This is especially important in a family transfer, as the risk could affect your loved ones.
Another way you can cut risk is to ensure your successor has business experience. As we’ve discussed, it’s good practice for your successor to shadow you. Leaving them with as much information as possible sets your business up for success. From the working culture to operations, each area is important.
Finances and operations aren’t the only elements that you should consider. Your employees need to be part of your plan too. Keep the exit transition smooth, so their work isn’t disrupted. Treat employees fairly throughout your exit. They’re just as crucial to your business as your successor.
Alongside employees, consider your suppliers and clients too. Like employees, you need to maintain these professional relationships. Business exits can cause chaos, but this doesn’t have to affect your contacts.
You can mitigate many of the risks that come with a transfer through a reliable plan. An exit strategy provides a step-by-step road map for your business. When you plan every element of your departure, you can prepare for future risks. This is why it’s important to take time and plan ahead. Rushed exits leave less time for planning and more time for hiccups.
During your exit planning process, due diligence is still essential. Just because you are handing over to another member of the family doesn’t mean you can skip this important step. It protects you and it protects your successor. Due diligence is here to make sure all areas of your business are above board. This process includes finances, legal contracts, and employee reviews. When you know all aspects of your business are thriving, you can step down without worry.
Due diligence can also help you to confirm the value of your business. Knowing an accurate value will help you achieve the transfer price you deserve. Business brokers can also help you find your company’s value. Uscita offers business valuations to businesses in engineering, manufacturing, and B2B industries in Cheshire and the North-West of England.
Should you stay on as an advisor after a family business transfer?
A question we see frequently is ‘Should I stay on as an advisor?’ This is a common question during a family transfer, as you want to provide the best for your family.
For some, becoming an advisor is a great idea. You’ve grown and nurtured the business, so your expertise could benefit the company. This can be helpful if your successor is new to the industry.
You might want to stay as an advisor through the transition period. This means you remain connected to the business for a while after the transfer date. As your successor steps up to the role, you can be there to offer help when needed.
If you’re considering remaining as a business advisor, ensure you have boundaries. Sometimes, advisory positions can become confusing. As a previous owner, you might find employees approaching you for decisions which are no longer within your remit. It could be out of habit but you must not undermine the position of the new owner by taking back control. Of course, you only want the business to thrive. However, without boundaries, there’s an opportunity for disagreements.
When remaining as an advisor to the business, you should consider what salary you need. Like any advisory role, you can command income from the work. Before you agree to the role, work out your salary expectations. Include your salary demands when you discuss your boundaries and job role. Treat this position as any job to reduce any disagreements in the future.
How can a business broker help when transferring your business to a family member?
Transferring a business allows you to step down and watch your family thrive. But, the preparation and transition period can be challenging. A professional business broker, like Uscita, can help you achieve your goal. It will also bring an independent viewpoint to the transaction which is not connected to the family. Professional advice can make the period easier, so consider reaching out for help.
Business brokers can offer free valuation services. A business valuation is helpful at any stage of your exit. Knowing a correct value provides options for your exit. It will help you plan for the future or expand your operations. This can serve as a benchmark for your successor too.
A valuation may also be necessary when taking out insurance. Some insurance providers look for recent valuations when providing insurance plans. This will avoid you overspending on premiums.
You might even want to gift your staff with shares or rewards during the business exit. If you have a recent valuation, you can precisely reward loyal employees. This is great for the company’s morale and minimises risk during the transfer period. It’s also another decision you should consult a tax accountant on to ensure the benefits are handled correctly.
Whether your exit is in the future or imminent, a free valuation is useful.
Uscita also provides comprehensive exit planning. Preparing an exit strategy is a large job. Working with an experienced professional can reduce stress throughout the process.
A business exit plan allows you to reduce your stake in the business over time. It also provides a map to increase profits or put a stop to losses. Your strategy choice affects the future direction of the business, so it’s better to have a plan. When it comes to an exit plan, more details result in a more satisfying exit. A professional broker will ensure you have everything in place before the plan is set in motion.
Not only does the business plan offer a bright future for your company, but it removes risk. If you’re worried about your sale, a professional can take the weight off your shoulders.
Conclusion
So, are you ready to transfer your business to a family member? Maintaining your legacy through a successor provides a satisfying exit.
If you’re choosing this route, the key element to remember is to start planning in advance. The more time you have to reduce your stake in the business, the smoother the transition will be. When planning, remember to include in-depth details for a clear and reliable exit route.
Take time to consider all available options. Will you stay on as an advisor? Will the transfer be a sale or a gift? How experienced is your successor? Each question needs careful planning. If in doubt, consider working with a business broker for tailored advice.
Are you ready to get started?