Over 5 million family-owned businesses exist in the United States, generating 50% of America’s GNP. Small businesses form a strong backbone for our entire economy and help build generational wealth for business proprietors. These entrepreneurs have worked hard to build their businesses in hopes that they will be able to leave a legacy for their families—a legacy that will last for many generations to come. Unfortunately, many of these ventures don’t survive beyond one generational transfer.
Research shows that nearly 45% of family business owners do not have a succession plan in place, leaving their businesses susceptible to fail.. This is why proper succession planning for your family business is key to its long-term success. Succession planning protects your business’s legacy by outlining clear instructions for role distribution, asset management, leadership planning, and other matters, like taxes and other liabilities, business values, and ownership stakes. Family business succession planning is essential, but it does come with some unique challenges.
What is Succession Planning?
Succession Planning for Your Family Business: Profits and Pitfalls
When the owner of a business reaches retirement, becomes incapacitated, or passes away, their business must have a continuity plan in place that transfers ownership of the entity to a successor. This is not unlike the principles of estate planning, and, actually, ownership interest in a business is typically included as part of an individual’s estate plan. The contrast is that a succession plan relates specifically to the business and is a strategy to facilitate the smooth, effective, and profitable transfer of the business. When a family member is named as successor, continuity can become more complicated. However, opportunities are plentiful for both your company and your family legacies.
One of the biggest challenges in family business succession planning is choosing who will inherit and run the business. This emotional process opens the door to family feuding and can negatively impact your business’s bottom line if the person chosen is not well-qualified. Properly defining and educating successors on their roles and responsibilities—as well as protecting business assets with supplemental succession planning tools—can help you avoid this. Additionally, perceptions of nepotism amongst non-family employees can compromise employee participation and commitment to the business should the successor not be received favorably.
Though there are several benefits (including keeping the business within family control), having a succession strategy in place for your family can increase the likelihood of altruism amongst family members, as beneficiary designations are clearly defined. This familial goodwill has the capability to lead to a more profitable business, which has the rippling effect of better retirement income for current and future generations. By working with a business lawyer or estate planning attorney, you’ll be able to identify and implement strategies to minimize business and estate tax liabilities and create maximum opportunities for intergenerational wealth.
Keys to Succession Planning for Family Businesses
1. Start planning early. It’s never too early to start planning for the future of your business. Earlier preparation means you’ll have strategies in place to help you avoid making difficult decisions in critical situations and allows you time to address any changes in structure, allocations, and goals.
2. Decide how you’d like to transfer the business. There are many options available for bequeathing your family business, including writing it into your Will, placing business assets in a trust, creating a trust-based estate plan, forming a business partnership, or even gifting it. Deciding which option is best for you will depend on the goals you have for your business.
3. Know the difference between ownership & management. Ownership and management succession are separate processes that aren’t necessarily congruent or concurrent. Transferring ownership can happen while the business owner continues to manage the business, while grooming the new owner and training the next manager.
4. Engage and prepare beneficiaries. Future owners should fully understand your vision and goals for the continuity of the family business. This includes comprehending the heart of your business…its culture and values. Engaging beneficiaries in day-to-day operations has the potential to instill a spirit of entrepreneurship and pride in the business, while also preparing successors for their leadership duties.
5. Family governance. Having a roadmap that comprehensively lays out the structure of the business as it relates to family members is just as important as developing a corporate governance strategy. Having a structure in place that clearly defines roles and responsibilities—aligning the needs of family business owners with the needs of the business—prevents conflicts and misunderstandings in the future.
6. Assemble your team. You know your business better than anyone, but you may find that you don’t have all the answers. Having a team of professional advisors in place to support you with business decisions now—and assist your successors in the future—creates a safeguard for any challenges and complexities that may reveal themselves as your business evolves.
Family business succession planning is an emotional and difficult process, yet also an exponentially gratifying one. Passing the business baton is less complicated with the assistance of an experienced business lawyer to help you devise a bulletproof strategy and choose the right options to ensure a lasting legacy. Kristel K. Patton, Attorney at Empowered Legacy Planning, is a trusted business and estate planning attorney who can guide you through everything you need to transfer your business to those you love and trust the most.