Family Business Succession Planning: What You Need to Know

Succession planning is one of the most emotional and challenging aspects of running a family business. Family business succession planning requires owners to look to the past and the future, be honest with themselves about their successor options, and open doors of communication that have been left firmly closed until now. Through it all, they must remember to always keep the best interests of the company in mind, even if it means disappointing family members.

Succession planning is inevitable. At some point a business will undergo an ownership transition whether it is ready for it or not. The most successful businesses are ready for it, choosing to create an exit strategy that supports their own personal goals as well as the broader goals of the organization.

family business succession planning

What is Succession Planning?

Succession planning is a written plan for the transfer of ownership of a company. They are most often associated with the voluntary retirement of owners, but are also used to ensure business continuity for unplanned and involuntary exits, such as death or disability. 

A succession plan determines who will own controlling shares of the business and who will run the business and/or take on leadership roles. In family-owned businesses, the obvious choice is the owner’s heirs, but sometimes there are no heirs, they are not interested, or the heirs are not the best choice. A succession plan allows the business owner to really think about who is best suited for continuing the family business and how the transfer of ownership will happen. 

Why is Succession Planning Important for Family Businesses? 

Family businesses benefit enormously from succession planning. These smaller businesses do not usually have the same degree of professional management as larger corporations. They simply don’t have a ready team in place to step in and step up when an exit occurs. This can cause the business to fail when the leader-owner is suddenly no longer in charge. A succession plan gives owners time to mentor and train up the next generation of leaders so they are ready to step in when the time comes. 

A succession plan can also ease worries when an ownership transition occurs. Employees, shareholders, customers, family members, and even the local community can all be affected when an ownership change occurs. A succession plan minimizes disruption to the business and helps ensure the uninterrupted continuity of services.  

Succession plans can provide tax benefits to the owners and successors, but perhaps the single biggest benefit of a family business succession plan is that it gives the owner control over how and when an exit will occur and who will be tasked with leading the business going forward. They can create their legacy their way and on their own terms.

Challenges in Succession Planning Your Family Business

One of the most difficult challenges in family business succession planning is deciding who will take over the family business upon the owner’s exit. This is an emotionally-charged decision that can cause strife within families and even among senior leaders. A different challenge could arise as well – finding a family member who wants to run the business. 

Another challenge? An owner must be willing to look into the future and admit that the time will come when they must give up the reins. This can be hard for self-made business owners to do.

Owners need to also be aware of how the transition will affect employees. The most successful family business succession plans obtain buy-in and support from key staff. This requires owners to be upfront and honest about the transition plan to gain employee trust and support.

Finally, simply running the business often takes up all of the owner’s time. They simply don’t have the bandwidth to devote the time and thought necessary to creating an appropriate succession plan and so, the plan is never made.

Beyond these interpersonal and emotional challenges, there is the practical challenge of understanding the legal and tax implications of different transition options and finding the professional guidance and assistance needed to actually select and create a business succession plan. 

The Process of Family Business Succession Planning

The process of actually creating a family business succession plan is similar regardless of industry, the age and size of the company, or its value. Successful plans take into account business needs and dynamics as well as family dynamics. The planning process should include these steps:

  • Family Discussion
    All family members in the business must be made aware of the need for a succession plan and accept that a formal plan is needed. 
  • Set Goals
    Once the decision to create a succession plan has been made, the next step is to identify goals for the plan related to yourself, the business, and your family. This should involve everyone in the family who will be affected by the transition so that every voice is heard and every position and need considered.
  • Identify Key Players and Define Roles and Responsibilities
    After you have gauged interest, it’s time to define roles and responsibilities based on the next generation of leaders.
  • Obtain an Independent Business Valuation
    Find out how much your business is worth. This can affect the transition option you choose.
  • Explore Transition Options
    Learn about the different transition options and how they will affect you, the business, and your heirs.
  • Address Management Succession Issues
    Inform company management of the plan and address their concerns to obtain support and buy-in.
  • Communicate
    Successful plans never neglect this step as it is vital to creating a smooth transition. Communicate the plan to all interested stakeholders including family members, employees, the board, and shareholders. 

Our best piece of advice is to start early. The earlier the process is started, the better. Succession plans can be years in the making. Early planning provides plenty of time to think about the possibilities, explore your options, mentor new leaders, and get the rest of the company comfortable with the idea. 

Family Business Transition Options

No two businesses are alike, which is why there isn’t a single tried-and-true succession plan that any business can adopt. Successful family business succession plans meet the needs of the business, the owner, management, and the family. There are several different ways business ownership can be transferred, depending on your goals. Transition options include:

  • Transfer ownership to a family member(s)
  • Enter a buy-sell agreement
  • Sale of shares via promissory notes, to be paid with bonuses or after-tax distributions
  • Gift shares
  • Create as trust as shareholder
  • Management buyouts
  • Sale to employees through an Employee Stock Ownership (ESOP) or cooperative
  • Sale to a 3rd Party
  • Liquidation

Professional Advisors to Include in Succession Planning

There are so many variables and legal, tax, and compliance issues at stake in succession planning that professional advice is a must. You will need to consult attorneys and accountants who are familiar with the transition plan selected to ensure the plan is legally and financially sound and to ensure documentation accuracy. 

Contact Aegis to Explore if an ESOP is an Option For Your Family Business Succession Plan

You may not want to think about the day when you won’t be running your business, but you will be glad when you do. A succession plan isn’t a bad thing. It’s not the end of your business. It’s a positive step that you can take to protect your company’s future.

If you are considering an ESOP as a succession strategy, contact the ESOP attorneys at Aegis Fiduciary Services. We have completed over 400 ESOP transactions and would be happy to discuss the suitability of an ESOP as a business succession strategy for your company.

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DISCLAIMER: The Articles displayed on this website do not constitute legal advice, nor do they substitute for the advice of qualified professionals. While the Articles displayed on this website are designed to provide information regarding the subject matter covered, we cannot guarantee the accuracy of any statements contained therein. If any legal advice or expert assistance is required, the services of qualified professionals should be sought.

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