As you may know, a great deal of literature is available on the life cycle of a business and how important it is for the business to achieve critical success factors through each stage of the cycle, from start-up and growth to maturity and decline. And while this is a relevant and important topic, another life cycle that is equally important in providing professional advice to family business entrepreneurs is the life cycle of the entrepreneurs who drive the business.
This article summarizes some key milestones in the life of a family business entrepreneur and highlights how providing professional advice depends on understanding where the entrepreneur or business owner is in their own life cycle. A business owner passes many milestones in a lifetime but we will focus on those for which we can best provide professional advice to the owner and the business.
Here are the key stages in the life cycle of an entrepreneur:
1. Initial years of the business
2. Development years
3. Expanding family involvement in the business
4. Intergenerational transition
5. Retirement (or semi-retirement)
At this stage, we have found that business owners need advice on areas such as business structure, understanding key facets of tax compliance, and establishing relationships with lenders, which includes setting up an appropriate system for internal and external financial reporting. In terms of tax planning, setting up a structure that is basic but that can adapt to an expanding set of business activities is helpful. Some initial distribution planning to optimize corporate and personal tax levels is also important.
The development phase can be the most dynamic stage of the journey, depending on how quickly and broadly the business expands. Timely financial reporting is critical both for internal use by the owner and for helping lenders or investors to understand the progress of the business in achieving its development milestones. That understanding is key because the business will often be looking for increased financing and investment to meet its development goals. As professional accountants, we need to be in tune with these needs and to ensure that our services are helpful at this stage. We provide owners with every chance to succeed at this stage, and if we can play a positive role in ensuring that the business’s financial reporting platform meets both internal and external needs in a credible way.
SEEKING THE RIGHT PROFESSIONAL ADVICE DEPENDS ON UNDERSTANDING WHERE YOU ARE IN YOUR OWN LIFE CYCLE.
EXPANDING FAMILY INVOLVEMENT IN THE BUSINESS
As the business meets its development goals, the owner will see a greater need for trusted team members the owner can rely on, and they often turn to family members, particularly the next generation. From our perspective, we want to be aware of these changes and ensure that the business structure can accommodate them now and in the future. Extensive family tax planning is needed, and it must properly integrate with the evolution of the
This stage does not happen overnight for the business owner, it evolves. We need to be aware of that evolution and help the owner ensure that their business and tax planning structures keep up with it. Doing so can allow for a smooth transition that optimizes taxes and is simplified but effective. The ultimate objective of this process from a business structure perspective is to partially or fully transfer the future growth of the business to the next generation.
RETIREMENT (OR SEMI-RETIREMENT)
At this stage, the needs of the owner move away from the business realm to the personal realm. We need to focus more on the personal wealth of the owner and ensure they are optimizing taxes on the distribution of their accumulated profits from the business. Other matters, such as legacy or estate planning, become more of a focus and we need to engage with the owner on these areas to ensure their structures are congruent with their estate
and legacy objectives.
The above is not meant to be a comprehensive list of services, or of the needs a business owner will have over a lifetime, but rather illustrates how a business owner’s needs change over time and how the professional services they need change in tandem. In the final analysis, it is critical that the professional advice and services that a business owner receives are delivered with knowledge of these critical life cycle phases.
First published in the September 2019 edition of The Business Advisor.