Here for the Long Haul: A Complete Guide to Family Business Succession Planning

Family businesses account for 64% of the gross domestic product in America. Without them, the country would lose 62% of employment opportunities. This is why it’s essential to discuss family business succession planning.

Family-owned businesses are the backbone of the economy in America. Any company that hopes to survive to the next generation must have family business succession planning as a priority. As the business owners approach retirement, they need to plan for succession.

Keep on reading to learn more!

What’s Business Succession?

Business succession is about ensuring you have enough money to retire on. It’s also about making sure that the firm will keep running after you quit. Who’ll manage the company when you’re no longer working there?

Will the business survive in your absence and will it incur profits or losses? These are some of the considerations that’ll inform your family business succession planning. You want to ensure a smooth transition of the business from one generation to the next.

Unfortunately, succession planning in business can be complicated. Relationships and emotions can come in the way of logic and reason. For example, most people aren’t comfortable discussing topics like death, aging, and financial affairs.

Importance of Family Business Succession Planning

One of the reasons for succession planning is to have an exit strategy for retirement. In other cases, long-term illness and disability can also necessitate planning. Where a good succession plan is missing, the family may be forced to sell the company under duress.  

With a plan, the policy benefits immediately become available to pay for the deceased’s share of the business. It helps eliminate time constraints and liquidity issues. In the long run, the possibility of an external takeover due to cash flow problems is reduced.

Where there’s no explicit instruction on who’s in charge of the company, the business risks failure. Building a successful family business is a lifetime task. You need to protect your legacy and keep your finances well secured.

Having a succession plan sets an agreeable selling price. It eliminates the need for valuation which can be costly and time-consuming. The succession plan is the pathway to the favorable settlement of the original owner’s estate.

When Should You Start?

It’s not uncommon for business owners to shelve the idea of family business succession planning. This is because they mostly want to focus on what’s happening in the now. They also may not want to deal with the hard facts of succession.

The truth is that it’s better to deal with the issue while there’s still time and flexibility. This is the time when you can make careful and well-informed decisions. Don’t wait till you have an emergency to make the succession decision.

If you didn’t make a succession plan at startup, the next best time to make that plan is now.

Building a Roadmap for Family Business Succession

Family business succession planning ensures the smooth transition of ownership. The shift starts with a handful of strategic decisions. You also need to organize the financials of your company.

More specifically, take the following steps:

1. Gather the Financial Documents

For the process of succession to be smooth, you must consolidate all the company documents. Things like inventory, company valuation data, tax returns, and updated financial records are all necessary. If you want to sell the business, the buyers will want to see the historical performance of the company.

Organizing the documents shouldn’t be only for transition purposes. A proactive organization protects the business in the unexpected event that a family member has to take over. It’s always advisable to be well-prepared in business.

2. Put up Buy-Sell Agreements

Buy-sell agreements refer to legally binding contracts used in the reallocation of business portions. They come in handy in case the business owner passes away, expresses interest in selling his share, or falls ill. The agreements serve to formalize information like the sale price of the company and the value of each share.  

The agreements also spell out who can or can’t be a buyer. It reduces the chances of conflicts between family members or partners who may have their interest ahead of the company’s.

3. Identify Potential Successors

A business will continue to flourish when it’s in the right hands beyond the tenure of the original owners. Unfortunately, finding the right person can take a lot of time, whether it’s a family member or outsider.

After finding the right person, the owner needs to train them on how to run the business. This is the chance to take inventory of the skills and traits of the successor to ensure business success.

4. Consolidate All Account Information

Before handing keys over to the new business owner, the current owner should organize all the accounts for a smooth transition. Login credentials for bank accounts, IT systems, and email accounts must be stored securely awaiting transition.

5. Change the Business Structure if Necessary

If yours is a sole proprietorship or partnership, the assets of the business are indistinguishable from your personal assets. As such, the company can’t be willed or passed on. The only assets that can be transferred are those of the company.

The best way to plan for the succession of a sole proprietorship is to change it into a corporation. It’ll continue to function even after you sell it or in the event of your demise.

6. Take Care of the Taxes

One common challenge with business succession is ensuring tax efficiency. Family business succession planning requires the owners to adopt a different business strategy. During normal operations, the owners try to maximize deductible expenses while minimizing profits.

This strategy can be counterproductive in the period before business succession. The owners should adjust their strategy a few years before the sale. They should aim at maximizing the value of the business to potential buyers.

Low profits don’t necessarily mean that the business is doing poorly. They, however, mean that an outside buyer won’t make a full value offer for purchase. Since buyers are interested in the historical financials, proper succession planning should concentrate on maximizing business value.

7. Get Power of Attorney

When family business succession planning, it pays to put your wishes in writing. Make sure you use a power of attorney, which is a written document for appointing a trustee. This person will act on your behalf in case of incapacitation or death.

With a written will, the probate process will be less cumbersome. In the document, you’ll clearly instruct who’ll manage and control your affairs in your absence. While preparing a power of attorney, you should also develop a comprehensive business plan.

This will be enacted by the trustee you appoint. It includes the transfer of business holdings and assets into the newly formed business entity.

What to Do for Successful Business Succession Planning

Planning for family business succession can be a complicated affair. Conflicts can arise between family members, especially where personal interests are in the frontline. If you want to increase the chances for the successful planning, here’s what to do:

1. Involve Your Family Members in the Planning

If you want to sow discord in your family, make the succession plan then announce it to the family. It’d be best if you can open dialogue among the family members and let everyone make their contribution. This way, you can pay close attention to each member’s emotions, ambitions, and goals.  

2. Make Realistic Plans

You may want your first-born to inherit the business, but do they have the skills necessary for running it? Have they even shown interest in running the business? Perhaps you should consider another more capable member.

What if there are no family members interested in the business? Your best bet would be to sell the business. Think and observe the strengths of all potential successors and plan accordingly.

3. It’s Not a Must for Everyone to Get an Equal Share

It’s a good idea in theory for everyone to get an equal share, but it may not work best for the business. Ownership and management are two separate business issues. Maybe it’d be fair for the successor to get the most significant share than members not actively involved in the business.

4. Get Help with Family Business Succession Planning

Accountants, lawyers, and financial advisors are all at your disposal to help you with planning. Besides, some companies specialize in business succession planning. They can facilitate the process and walk you and your family through the pertinent issues.

In Review

Putting off family business succession planning can be detrimental to your company. Most family-owned businesses thrive for years because their owners had an exit strategy for several generations. Planning is also the most efficient way of eliminating family squabbles.

Succession touches on every vital aspect of your business and personal finances. Besides taxes, you’ll also deal with securing the financial future of your family, which can be emotionally daunting. For enhanced succession planning, it’s advisable to involve your family members in the planning process.

Make realistic decisions, not based on emotions. If the planning proves to be too much for you, get professional help. By all means, do all you can to secure the future of your business.

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Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.