What is a Family Business Succession Plan and Do I Need One for My Business?
If you intend to pass your business on to the next generation, developing a business succession plan should be top of mind when considering the future of your company. Eventually, you will want (or need) to retire, but rather than waiting until that time comes to decide what will happen to your business, it is prudent to develop a succession plan early on.
When it comes to family businesses, succession planning can be complicated primarily because of the emotions and close-knit relationships involved. Many people are uncomfortable when it comes to discussing topics involving death and finances, but in order to set yourself and your family up for success, you’ll need to implement a reliable plan.
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.
Family Business Succession Planning Tips
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:
Tip #1: It’s Never Too Early to Begin Planning
While five years is a good time to start planning, 10 years prior to your succession is even better to begin implementing details that may be involved. You may have been advised to build an exit strategy directly into your business plan, which is beneficial in the long run. The greater amount of time you are able to spend on succession planning, the smoother the transition process will likely be.1
Tip #2: Involve Family Members
Creating a succession plan quietly on your own (and then "announcing" it to all those who will be affected) can be a recipe for disaster. Instead, you’ll want to get your family members involved early on so that you can discuss and strategize together. This will also give your loved ones time to decide if they do want to be involved directly, or if they would rather pursue other interests.
You may also discover during this time that some family members are passionate about certain components of the business, while others are most capable of handling other aspects. Most importantly, by involving your family members, you may realize that a succession plan that keeps the business in the family is not the best decision after all, and that, ultimately, it would be best to sell. Communication is key to creating and implementing a plan that will help your business thrive while keeping your family dynamic strong.
Tip #3: Train Your Successors
You’re more likely to achieve success with your transition plan by working with your successors for an ample amount of time before you hand over full responsibility. Beyond the day-to-day, also consider involving your successors in strategic planning and decision making five or ten years out. While it may be difficult to give up some control while you are still very much "in charge", allowing your successors to be a key part of strategic initiatives will greatly improve their ability to continue to handle this after your exit.
Tip #4: Acquire Outside Help
A variety of professionals, including lawyers, accountants, financial advisors (hint), etc. can help you organize and develop a successful succession plan. With their expertise, you may find yourself analyzing options and considering details that you wouldn’t have thought of otherwise. By partnering with professionals that specifically specialize in family business succession planning, you'll get the added benefit of having someone who is able to facilitate the process of working through potential issues.
Do What’s Best for the Business
At the end of the day, it’s important to take into consideration what will ultimately be in the best interest of your business. Family business succession planning can be complicated because it requires you to make difficult decisions with your loved ones in mind. By connecting with professionals and utilizing a process that outlines the details involved, you’ll be able to ensure an effective, more efficient, and successful plan to help your business maintain growth over time.
To discuss this content further or to ask any financial-life question you may have, we encourage you to reach out to us at 724.942.2639 or schedule a FREE/no-obligation time to chat with an advisor at your convenience.
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