Succession Planning Tips for Family Owned Businesses

Any family that intends to pass on its business to the subsequent generation is going to need a well-designed business succession plan.

At some point, everyone develops a natural desire to retire. Deciding what happens to your company can be as critical as guaranteeing that you have enough money to retire on. Who’s going to manage the operations of the business? How will the ownership be transferred?

With family businesses, succession plans are particularly complex due to the relationships and feelings involved and because a large portion of folks are simply not comfortable talking about topics like aging, passing away, and other financial matters.

Taxes, Business Structure, & Ownership

The assets of a sole proprietorship or partnership are usually the same as the personal assets of the owner. Separate yourself from the business by forming a corporation that will continue to operate even after it is sold or after an owner has passed away.

If transferring the business, it’s vital to understand that management and ownership are not the same. You may determine, for example, to transfer the management of your business to just a single child, but you could still transfer equal shares of ownership to all of your children, regardless of whether or not you’d like them involved in the operations of the business or not.

Once you decide that the management and ownership are defined, you may consider seeking out a lawyer who specialize in business succession planning who will be able to provide you with advice about the various strategies available to minimize taxes when the transfer occurs.

By restructuring your corporation to exchange your common shares in the company for preferred shares with a fixed value equal to the common-share value, you’d then be able to pass all of the future capital appreciation and income tax liability on that future appreciation to your children while you retain control of the current value of the business, which would in effect freeze the corporation.

Here are some additional business succession tips from The Balance – Small Business blog:

1. Family is the primary emphasis of succession planning for many businesses. 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. Consider six key tips to have the best chance at a successful transition.

2. Start planning early: Five years in advance is good, but 10 years in advance is better. Many business advisers tell budding entrepreneurs to build an exit strategy right into their business plan. The longer you get to spend on succession planning, the smoother the transition process is likely to be.

3. Involve family members in discussions: Making your own succession plan and then announcing it is the surest way to sow family discord. Discussing the plan helps to identify who in the family wants to be involved directly and who is focused elsewhere. It also might help some family members find interest in the business they didn’t know they had.

4. Be realistic: 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.

5. Do what’s best for the business: Making sure everyone has equal shares seems nice, but it may not be in the best interests of your business. 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 nonvoting shares so that only some of the family shareholders can make decisions on company policy. It may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children.

6. Train your successor(s): How can you expect your successor to take over and run your business successfully if you haven’t spent any time training him? Your 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.

7. Get outside help: Lawyers, accountants, financial advisers, and others can help you put together a successful succession plan. There even are companies that specialize in family business succession planning that will facilitate the process of working through issues.