Did you know that 90% of American businesses are family-owned? Unfortunately, many of these companies don’t have succession plans. Small business owners are often so focused on day-to-day operations that they don’t think about the impact of inheriting a business one day.
If you’ve inherited a business, even if you’re prepared to run it, you may be grappling with the next steps to build on the company’s success. In addition to legal and financial issues, as well as estate and capital gains tax, you’ll want to consider current operations and future opportunities. Here’s how to manage if you’ve inherited a business.
How to Manage the Business You Have Inherited?
Of course, the first step is learning as much as possible about the business. What are its strengths? Where are the opportunities for growth? What could threaten its growth or development? Who are the main competitors, and what are the weakest points of the business?
If you’re familiar with the business or have worked there for years, this step should be easy. You’ll also want to examine the business’s operations, financials, personnel, facilities, legal status, and industry. You would want to look at beneficial ownership and whether you need a US visa for the business.
You have the option to manage the inheritance on your own. You also have the option to bring on a partner, hire a CEO, or sell the company. You’ll first need to understand the business and its potential to determine the best path.
Here are the steps to make the best plan for your inherited business.
1. Understand the Business
Start by learning about the business you have inherited. Familiarize yourself with the industry, customers, and competition. Talk to current employees and managers to understand their perspective of the business. Research market trends, current market share, product offerings, and consumer demand. Look at the industry to understand current trends and growth opportunities.
2. Evaluate the Business
It’s important to thoroughly evaluate the business. Since the primary aim of a business is financial growth, start with the financials. Look at cash flow, cash reserves, loans, debts, and tax liabilities. Look at past years’ balance sheets to understand the business’s financial health and any growth.
Then, look at operations. Are the employees happy? Do you see areas of inefficiency or opportunities for growth? Finally, look at the marketing strategy. How has the company positioned itself? What is the primary source of clients? What new marketing channels or opportunities are available?
You’ll also want to understand tax consequences.
3. Develop a Plan
Once you understand the business, it’s time to develop a plan for the inherited business. This includes deciding whether you’ll run the business, maintain the current management, or hire a new management team. You can also consider bringing on a partner or selling the business.
Then, consider setting goals across various areas, from financial growth and company efficiency to customer satisfaction and employee retention. You can create a timeline for implementation and measurements of success. You may also want to expand the business plan with the future horizon. Finally, consider establishing key metrics for success to gauge the progress of your implementation.
4. Implement Changes
The steps to implement changes and improvements to the inherited business vary by industry, business type, size, and company culture. While it can be tempting to change everything at once, look at what is working and balance that with areas for possible improvement.
When changing key business metrics, communication is essential across stakeholders, from employees and managers to investors. Discuss any changes with employees and key stakeholders. Take their suggestions and address any resistance. Consider both the long-term goals and their expertise within the business to build support and momentum for changes and growth.
5. Maintain and Grow the Business
The ongoing efforts required to maintain and grow the inherited business include a continuous review of processes, personnel, and products to understand market demand, consumer needs, and growth opportunities. To remain competitive, you’ll want to perform regular SWOT (strengths, weaknesses, opportunities, and threats) analysis to understand what’s working and where the business has growth opportunities.
Likewise, you’ll want to stay connected with others in the industry to adapt to market trends while fostering innovation. If that seems like a lot, it is! But it can be broken down into small manageable pieces and divided amongst team members. Focussing on principles like continuous improvement can help the business build momentum and growth over time while reducing inefficiency.
Alternatives to Managing an Inherited Business on Your Own
In addition to managing an inherited business independently, you have options from bringing on a team to selling the business. Here are the alternatives that could work for you:
1. Get a Business Partner to Join the Team
One option to ensure business success is to bring on a business partner. The best time to tap a business partner to help you manage an inherited business is shortly after the inheritance closes or whenever you want to rejuvenate the company. Bringing a business partner on board can defray some business responsibilities and liabilities, making dealing with the ownership transition easier.
Who is the right business partner? Of course, you can bring on a family member like a sibling or cousin. But you could also recruit a partner with complementary skills or expertise the business needs. There are also apps and websites to help you find a business partner. A successful business partnership will bring complementary skill sets and a unified business strategy.
The advantages of having a business partner are shared responsibilities, the possibility of complementary skill sets, and support in your entrepreneurship journey. Possible disadvantages can stem from disagreements or misunderstandings in management style, financial decisions, or business direction.
For that reason, it’s the best practice to draft a partnership agreement or operating agreement where each partner’s rights, responsibilities, ownership percentage, and profit distribution are clearly defined. A comprehensive partnership agreement is equally important if your business partner is a friend or relative. You can draft the partnership agreement yourself or hire a lawyer.
2. Sell the Inherited Business
Should you sell? It may be the best time to sell the inherited business instead of managing it alone or with a business partner if you have no interest in entrepreneurship, the business, or the industry. You might also consider selling the inherited business if you’re currently running another business and don’t have the time, bandwidth, or desire to continue the inherited business.
The possible advantages of selling an inherited business are gaining additional cash for other businesses or pursuits and freeing yourself from the burden of running a business. For many owners who inherit a business, deciding to sell can take time, as it’s not a decision you necessarily want to make during a time of grief.
If you decide to sell the business, how you sell will depend on the business structure, industry, and business size. A buyout is an option for corporations or LLCs. If the business is a corporation with multiple shareholders or a multi-member LLC, you could sell your share to another owner. You must also check the company’s bylaws to understand the rules and restrictions.
3. Refuse the Inherited Business
While it’s uncommon, you always have the option to decline the inheritance. You can disclaim an inheritance for any reason. You could refuse an inherited business if you prefer that it go to a sibling, child, or other beneficiary. You could also disclaim an inherited business if it has substantial debt or unsustainable business practices you don’t want to deal with. You could also disclaim an inheritance due to your relationship with the person who left the business, or if the business violates personal or ethical values.
The possible advantages of declining an inheritance are that you won’t be responsible for the business, its debts and liabilities, or management. Of course, the disadvantages of declining the inheritance could mean you miss out on carrying on a legacy, building a business, and potentially benefiting financially.
To decline an inherited business, you’ll need to execute a written disclaimer that expresses your irrevocable and unqualified intent to refuse the bequeathed business. This should be signed, notarized, and filed with the probate court or the executor of the will. You can speak with a lawyer to ensure all filings are correctly done.
Growing a Family Business
A business succession plan can ensure your family business grows and thrives from one generation to the next. If you’ve inherited a family business that doesn’t have a legal business entity, consider forming an LLC to protect your business. doola can help with low-cost, fast formation service.
A limited liability company can add credibility to your business while protecting your personal assets. With simplified administration and fast filing, forming an LLC could be the next step for your company. Get doola’s fast-formation services to form an LLC in all 50 states and learn more about the best states to form an LLC.
What if there are multiple beneficiaries to inherit the business?
If multiple beneficiaries inherit a business, each will be assigned a percentage of the benefit. For example, if there are two beneficiaries, they may have equal shares, or one might have 80% and the other 20%. If the will doesn’t specify which beneficiary is responsible for running the business, the beneficiaries will need to decide this amongst themselves.
Do I need to have prior experience in running a business to inherit one?
Prior experience in running a business makes the transition to take over a business easier, but it’s not legally required. Ideally, you will have close discussions and understanding of the business before inheriting it. But even without prior experience, you could bring on a partner or manager with experience in the business.
Will I be responsible for any existing debts or liabilities of the inherited business?
Yes, you will be responsible for any existing debts or liabilities for the inherited business. Depending on the business structure, your personal assets may be protected from any business debts, but you’re still responsible for the business management, or appointing a management team to manage business finances.
Can I merge the inherited business with my own existing business?
You could merge the inherited business with your existing business. However, whether it’s possible depends on the nature of the business, its financial state, and other legal considerations based on the business structures.
Can I seek funding or loans to support the inherited business?
Yes, you can seek funding or loans to support an inherited business. In addition to business loans and personal loans, you could consider an inheritance advance company or an inheritance lender for short-term funding.