Less than one-third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership. At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few.
The following is a list of options to consider:
- Close the doors.
- Sell to an outsider or employee.
- Retain ownership but hire outside management.
- Retain family ownership and management control.
There are four basic reasons why family firms fail to transfer the business successfully:
- Lack of viability of the business.
- Lack of planning.
- Little desire on the owner’s part to transfer the firm.
- Reluctance of offspring to join the firm.
The primary cause for failure is the lack of planning. With the right succession plans in place, the business, in most cases, will remain healthy.
What’s involved in succession planning for family businesses?
Transferring the family business requires the family to make a determined effort to do the following:
- Create a business strategic plan.
- Create a family strategic plan.
- Prepare an Estate Plan.
- Prepare a Succession Plan, including arranging for successor training and setting a retirement date.
These are the four plans that make up the transition process. By implementing them, you will virtually ensure the successful transfer of your business within the family hierarchy.
Q: What is a business strategic plan?
A: A business strategic plan defines goals, objectives, and targets for a company and outlines its resources will be allocated in order to achieve them. When a strategic business plan is in place, it allows each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company’s future. A strategic plan is long-term in nature and focuses on where you want the business to be at some future date.
Q: What is a family strategic plan?
A: The family strategic plan establishes policies for the family’s role in the business and is needed to maintain a healthy, viable business. For example, it should include the creed or mission statement that spells out your family’s values and basic policies for the business, and it may include an entry and exit policy that outlines the criteria for working in the business. The plan should consider which family members desire to have a part in management of the business versus those who desire a more passive role.
Q: What is an estate plan?
A: An estate plan is a written document that outlines the disposal of one’s estate and includes such things as a will, trust, power of attorney, and a living will. An estate plan is critical for the family and the business because, without it, you will pay higher estate taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax effective manner.
Q: What is a succession plan?
A: A succession plan identifies key individuals who will be groomed to take over the business when the time comes. It also outlines how succession will occur and how to know when the successor is ready. Having a succession plan in place goes a long way toward easing the founding or current generation’s concerns about transferring the firm.
How do I know whether I have what it takes to run my own business?
Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business include wanting to be self-employed, wanting financial and creative independence, and wanting to maximize your skills and knowledge.
When determining what business is “right for you,” consider what you like to do with your time, what technical skills you have, recommendations from others, and whether any of your hobbies or interests are marketable. You must also decide what kind of time commitment you’re willing to make to running a business.
Then you should do research to identify the niche your business will fill. Your research should address such questions as what services or products you plan to sell, whether your idea fits a genuine need, what competition exists, and how you can gain a competitive advantage. Most importantly, can you create a demand for your business?
What should I include in a business plan?
The following outline of a typical business plan can serve as a guide that you can adapt to your specific business:
- Financial Management
- Concluding Statement
Q: What should be included in the introduction to my business plan?
A: The introductory section of your business plan should give a detailed description of the business and its goals, discuss its ownership and legal structure, list the skills and experience you bring to the business, and identify the competitive advantage your business possesses.
Q: What should be included in the marketing section of my business plan?
A: In the marketing section, you should discuss what products/services your business offers and the customer demand for them. Furthermore, this section should identify your market and discuss its size and locations. Finally, you should explain various advertising, marketing, and pricing strategies you plan to utilize.
Q: What should be included in the financial management section of my business plan?
A: In this section, explain the source and amount of initial equity capital. Also, develop a monthly operating budget for the first year as well as an expected return on investment, or ROI, and monthly cash flow for the first year. Next, provide projected income statements and balance sheets for a two-year period, and discuss your break-even point. Explain your personal balance sheet and method of compensation. Discuss who will maintain your accounting records and how they will be kept. Finally, provide “what if” statements that address alternative approaches to any problem that may develop.
Q: What should be included in the operations section of my business plan?
A: This section explains how the business will be managed on a day-to-day basis. It should cover hiring and personnel procedures, insurance, lease or rent agreements. It should also account for the equipment necessary to produce your products or services and for production and delivery of products and services.
Q: What should be included in the concluding statement of my business plan?
A: In the ending summary statement, summarize your business goals and objectives and express your commitment to the success of your business. Also, be specific as to how you plan to achieve your goals.
Is a home-based business right for me?
To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, an understanding of what’s involved, and a lot of hard work.
You have to be willing to plan ahead and then make improvements and adjustments along the road. Overall, it is important that you establish a professional environment in your home; you should even set up a separate office in your home, if possible.
What legal requirements might affect a home-based business?
A home-based business is subject to many of the same laws and regulations affecting other businesses. Be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business. For instance, be aware of your city’s zoning regulations. Also, certain products may not be produced in the home.
Most states outlaw home production of fireworks, drugs, poisons, explosives, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
In terms of registration and accounting requirements, you may need a work certificate or a license from the state, a sales tax number, a separate business telephone, and a separate business bank account.
Finally, if your business has employees, you are responsible for withholding income and social security taxes, and for complying with minimum wage and employee health and safety laws.
How can I avoid running into cash flow problems in my small business?
Failure to properly plan cash flow is one of the leading causes of small business failures. Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow.
A business’s monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.
The Operating Cycle
The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash. For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable – credit sales. Accounts receivable are usually paid 30 days after the original purchase date. This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, which increases your cash. Now your cash has completed its flow through the operating cycle and is ready to begin again
Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear.
A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.
What steps can I take to improve my business cash flow?
To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:
Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm’s collection policies are not aggressive.
Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services.
Manipulating price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product’s market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.
Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.
- Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm’s cash reserves.
Should I keep a cash reserve in my small business?
You should always keep enough cash on hand to cover expenses and as an added cushion for security. Excess cash should be invested in an accessible, interest-bearing, low-risk account, such as a savings account, short-term certificate of deposit or Treasury bill.