Successful businesses typically begin small, and this is especially true of family-owned businesses. Dilip Shanghvi founded Sun Pharmaceutical, the largest drug company in India, with just $160 borrowed from his father. Nike began as a distributing outfit called Blue Ribbon Sports that co-founder Phil Knight that was initially ran from the trunk of his car. Being an entrepreneur requires you not only to believe in yourself and your vision, but that you also hang on when success arrives and takes you for the ride of your life.
With that in mind, consider this: as a business grows and becomes more complex, so does the process of planning ahead for succession, asset protection, and other future challenges and expenses. And while 88 percent of family business owners believe their family will still control their business after five years, the fact is, 70 to 80 percent of family-owned business do not survive through the second generation. These business failures are often due to a lack of comprehensive wealth planning. Such planning must align with the business owner’s goals and values, as well as account for the dynamics that influence the daily operation of a family-owned business.
The Dynamics of a Family Owned Business
There are three distinct components that, when combined, define the unique dynamics of a family-owned business. Each component must be taken into consideration when developing an effective wealth-planning strategy, especially one that includes a succession plan. Those components are:
Family personalities: This takes into account which family members are involved in the business, either directly or indirectly, the characteristics of each person’s personality, and if there is the potential for conflict between these different personalities.
Business and management: This refers to those who actually run the business, who is the CEO, and who makes the day-to-day operational decisions.
Ownership structure: Ownership includes who owns and controls stock in the company, who receives distributions, and whose lifestyle relies on cash flow from the business.
The potential for conflicts arises whenever these components intersect. Taking the time to thoroughly assess each component with an expert advisor will help a family business owner determine what he or she wants to accomplish, both from a wealth-planning and business continuity standpoint, and begin the process of creating a total wealth plan that supports those goals.
The Components to a Total Wealth Plan
A total wealth plan for a family-owned business must include each of the following components. The first component is a wealth planning strategy that reflects the business owner’s goals and values and connects to a business plan (the second component) designed to ensure the continuity of the business. The third component consists of the tax and legal strategies or agreements that bring together the wealth and business vision.
When these three components are brought together, not only can an effective succession plan be developed, but many other financial challenges can be addressed and prepared for as well.
Wealth Planning for Family Businesses
If wealth-planning for your family-owned business sounds intimidating, consider how brave you were to start up and found your business in the first place. You can draw upon that entrepreneurial spirit to take the necessary steps to make sure your business continues, and, with the help of a trusted wealth advisor, create a plan that enhances both its current and future value.
For experienced guidance in wealth-planning strategies for your family business, contact our team at AltruVista today.