Family Business Succession Planning - Tips for Success
Family Business Succession Planning Needs to Start Early
Family business succession planning should be a priority for every company that wants to pass on its business to the next generation.
Sooner or later, everyone wants to retire. But if you own a family business, retirement isn't just a matter of deciding not to go into the office any more. Besides ensuring that you have enough money to retire on, the whole question of what happens to the business becomes paramount. Who's going to manage the business when you no longer work the business? How will ownership be transferred?
If the business will be carried on by relatives then it is important to have a family business succession plan in place to manage these issues, setting up a smooth transition between you and the future owners of your business. With family businesses, succession planning can be especially complicated because of the relationships and emotions involved - and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs.
Perhaps this is why more than 70 percent of family-owned businesses do not survive the transition from founder to second generation. In most cases, the "killer" is taxes or family discord, both issues that good family business succession planning will cover.
Do You Need to Change the Structure of Your Family Business First?
By its definition, the assets of a sole proprietorship or partnership are indistinguishable from the personal assets of the owner and as such the business cannot be willed or passed on. Only the assets of the business can be transferred. If you have a sole proprietorship or partnership and wish to have one or more successors continue the business, the best option is to form a corporation which by definition can continue to operate after it is sold (or upon the death of the owner).
Management, Ownership, and Taxes
Once you've sorted out the structure of your family business and turned it into a corporation if you need to, think of family business succession planning as broken into three main issues; management, ownership, and taxes.
It's important to realize that management and ownership are not necessarily one and the same. You may decide, for instance, to transfer management of your business to just one of your children but transfer equal shares of business ownership to all your children, whether they're actively involved in operating the business or not.
The taxes component of succession planning looks at the minimization of taxes upon death. There are asset transfer tax strategies that will help you do this, such as freezing the value of your interest in the company while you transfer ownership to your children.
By reorganizing your corporation to exchange your common shares in the business for preferred shares with a fixed value equal to the common-share value, you can pass all future capital appreciation and income tax liability on that future appreciation to your children while you retain control, and access to the current value of the business, in effect freezing the corporation.
For many family businesses, family is the primary emphasis of succession planning. Whether you're thinking about the future management of your business, how ownership is going to be passed along, or taxes, you won't be able to help thinking about how your decisions will affect your family.
Tips for Successful Family Business Succession Planning
1) Start business succession planning early.
Five years in advance is good. Ten years in advance is better. Many business advisers tell budding entrepreneurs to build an exit strategy right into their business plan. The point is, the longer you get to spend on succession planning, the smoother the transition process is likely to be.
2) Involve your family in business succession planning discussions.
Making your own succession plan and then announcing it is the surest way to sow family discord. "Opening a dialogue among family members is the best way to begin the process of a successful succession plan - one where close attention is paid to the personal feelings, ambitions and goals of everyone concerned" (Grant Thornton, LLP).
3) Look at your family realistically and plan accordingly.
You may want your first-born son to run the business, but does he have the business skills or even the interest to do it? Perhaps there's another family member who is more capable. It may even be that there are no family members capable of or interested in continuing the business and that it would be best to sell it. Examine the strengths of all possible successors as objectively as possible and think about what's best for the business.
4) Get over the idea that everyone has to have an equal share.
While this is a nice idea in theory, it may not be in the best interests of your business. Remember that management and ownership are separate business succession planning issues. It may be fairer for the successor(s) you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Another alternative is to use voting and non-voting shares so that only some of the family shareholders can make decisions on company policy. Or it may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children.
5) Train your successor(s) and work with them.
How can you expect your successor to take over and run your business successfully if you haven't spent any time training him or her? Your family business succession planning will have a much better chance of success if you work with your successor(s) for a year or two before you hand over the reins. For solo entrepreneurs, sharing decision making and teaching business skills to someone else can be difficult, but it's definitely an effort that will pay big dividends for the business.
6) Get outside help with your business succession planning.
Lawyers, accountants, financial advisors - there are many professionals that can help you put together a successful succession plan. There are even companies that specialize in family business succession planning, who will facilitate the process of working through both family and succession plan issues.
If you want to pass your family business along to the next generation, putting off business succession planning is the worst thing you can do. A good succession plan can ensure that you have the funds you need to retire and that the business you have built continues to thrive in the hands of the next generation.
When Family Business Succession Is Not an Option
If succession is not an option the business will need to be wound up or sold. For information on selling or closing your business see: