Family businesses are the backbone of many economies, but their longevity often depends on successful transition from one generation to the next. Developing a family business succession plan is a critical consideration when contemplating the future of your company. Whether you’re planning to retire in the near future or simply looking ahead, creating a succession plan early on may help set your business and family up for potential long-term success.
For family businesses, succession planning can be particularly complex due to the emotional ties and close-knit relationships involved. Many people find it uncomfortable to discuss topics involving death and finances, but addressing these issues proactively could be beneficial for both your business and your family.
In this article, we’ll explore seven essential steps that could help you create a family business succession plan. These steps aim to address the unique challenges faced by family-owned businesses and provide a structured approach to planning for the future.
What is a Family Business Succession Plan?
A family business succession plan is a strategic blueprint that outlines the process for transferring ownership and management of a family-owned business from one generation to the next. This plan typically includes key elements such as identifying and preparing successors, establishing timelines for the transition, addressing legal and financial considerations, and ensuring that the business’s values and vision are preserved. The goal of a family business succession plan is to ensure a smooth and successful transition that maintains the business’s continuity and addresses potential conflicts among family members.
Management vs. Ownership
If you’re considering transferring your business, it’s important to first realize that management and ownership are not one and the same. For example, you may decide that you’d like to transfer the management of your business to only one of your children while transferring equal shares of ownership to all of your children, whether they are actively involved in the operation of the business or not.
Regardless of how you define management and ownership, you will want to work closely with financial professionals and lawyers who specialize in business succession planning. They will be able to offer advice and strategies focused on the details of your business, including how to potentially minimize taxes when the transfer does take place. This is crucial, as failing to have a proper tax strategy in place is one of the greatest mistakes you can make when it comes to business succession planning and your own retirement.
7 Steps to Family Business Succession Planning
For many businesses, family is the primary consideration of succession planning. From the future management of your company to ownership details and tax liability, your decisions will ultimately have an impact on one or more members of your family. Here are a few tips to keep in mind during this transition:
Step 1: Start Planning Early
It’s generally advisable to begin succession planning well in advance of your intended transition. While five years before your planned exit is a good starting point, beginning the process 10 years prior could potentially allow for an even smoother transition. Some business advisors suggest building an exit strategy directly into your business plan from the start.
Early planning may offer several potential benefits:
- More time to develop and implement a thoughtful transition strategy
- Opportunity to adjust the plan as family and business circumstances evolve
- Reduced stress and potential for conflict during the transition process
Step 2: Define Management vs. Ownership
When considering the transfer of your business, it’s important to recognize that management and ownership are not necessarily the same thing. For example, you might decide to transfer the management of your business to one child while dividing ownership shares equally among all your children, regardless of their active involvement in the business operations.
This step often involves:
- Clearly defining roles and responsibilities for future management
- Determining how ownership will be distributed among family members
- Considering the implications of different management and ownership structures
Working with financial professionals and lawyers who specialize in business succession planning could be beneficial. They may offer strategies focused on the specifics of your business, including potential approaches to minimize taxes when the transfer takes place.
Step 3: Involve Family Members Early
Creating a succession plan in isolation and then announcing it to those affected could potentially lead to conflicts. Instead, consider involving your family members early in the process. This approach may:
- Allow for open discussions about individual interests and capabilities
- Provide time for family members to decide if they want to be directly involved in the business
- Help identify passionate and capable successors for different aspects of the business
- Reveal whether keeping the business in the family is the best decision, or if selling might be a more suitable option
Communication is often key to creating and implementing a plan that could help your business thrive while maintaining strong family dynamics.
Step 4: Train and Prepare Your Successors
Achieving success with your transition plan may be more likely if you work with your successors for an ample amount of time before handing over full responsibility. Consider:
- Involving successors in day-to-day operations to build their experience
- Including them in strategic planning and decision-making processes
- Gradually relinquishing control to allow successors to grow into their roles
While it may be challenging to give up some control while you’re still in charge, allowing your successors to be a key part of strategic initiatives could potentially improve their ability to handle these responsibilities after your exit.
Step 5: Acquire Outside Help
A variety of professionals, including lawyers, accountants, and financial advisors, may help you organize and develop a succession plan. Their expertise could potentially help you:
- Analyze options you might not have considered otherwise
- Navigate complex legal and financial aspects of succession planning
- Facilitate discussions and mediate potential family conflicts
Partnering with professionals who specialize in family business succession planning might provide additional benefits in working through potential issues unique to family businesses.
Step 6: Develop a Tax Strategy
Tax planning often plays a critical role in succession planning, particularly in minimizing the potential tax burden during the transfer of ownership. Consider:
- Exploring strategies such as gradual gifting of shares or setting up trusts
- Integrating tax strategies into your overall financial and retirement planning
- Consulting with tax professionals to understand the implications of different succession strategies
Having a proper tax strategy in place could be crucial for both the business transition and your own retirement planning.
Step 7: Do What’s Best for the Business
While family considerations are important, it’s crucial to prioritize the long-term health and success of the business when making succession decisions. This may involve:
- Balancing family dynamics with business needs
- Making decisions that support both the family and the business
- Regularly reviewing and adjusting the succession plan as circumstances change
Remember, what’s best for the business might not always align perfectly with family expectations, but finding a balance could potentially lead to better outcomes for both.
Taking Action on Your Family Business Succession Plan
Creating a family business succession plan is a complex but potentially rewarding process. By following these seven steps, you may be better equipped to navigate the challenges of transitioning your family business to the next generation.
Remember, every family and business is unique, and there’s no one-size-fits-all approach to succession planning. Consider seeking professional advice to help tailor a plan that fits your specific circumstances and goals.
At Riverbend Wealth Management, we work with business owners to help them navigate the complexities of succession planning. While we can’t guarantee specific outcomes, our team is experienced in helping clients explore their options and develop strategies that aim to support both their business and personal financial goals. Contact us for a no-obligation consultation with our team of fiduciaries.
