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Jul 11, 2017

Succession Planning for Family-Owned Businesses

Featuring Blake Spina

The impact of family businesses on the United States economy continues to gain strength, as they account for 50 percent of the U.S. gross domestic product. We are not only referencing the “mom-and-pop” shops, as 35 percent of Fortune 500 companies are private or public companies that are controlled by families. This is great news for the future of family businesses overall, but results may vary for some individual businesses.
Statistics show that family-owned businesses often fail to survive into the second generation and beyond. A leading concern for business owners is the uncertainty about whether the younger generation will have the skill set and experience required for successfully running a business. This is where a well-thought-out succession plan, or lack thereof, is crucial to the fate of a family business. 
Family businesses have several issues that work against the successful continuation of the business, including generation transition, alignment of family interests, balancing of financial returns, interfamily disputes, and estate issues. Fortunately, with some planning and guidance from their trusted professionals, most of these issues can be dealt with by creating a viable succession plan.
By following some key steps, which are relevant to almost any family business, the business can create a practical succession plan, provide for the financial independence of the retiring owners, and position the business for continued success and growth:
Step 1: Establish Goals and Objectives 
  • Develop a collective vision, a set of goals and objectives for the business.
  • Determine the importance of continued family involvement in leadership and ownership of the company, while considering the option to bring in outside professional management.
  • Establish personal retirement goals and cash flow needs of retiring family owners.
  • Identify goals of next generation management, both personal and business.
Step 2: Establish a Decision-Making Process
  • Identify and establish governance processes for involving family members in decision-making.
  • Establish a method for dispute resolution, if needed.
  • Document the succession plan in writing.
  • Communicate succession plan to family/shareholders.
Step 3: Establish the Succession Plan
  • Identify successors – both managers of the company and owners of the business.
  • Identify active and non-active roles for all family members.
  • Identify required additional support for the successor from family members.
Step 4: Create a Business and Owner Estate Plan
  • Address taxation implications to the owner/business upon sale or transfer of ownership, death, or divorce.
  • Review owner estate planning to minimize taxes and avoid delays in transfer of stock to remaining owners or spouse.
  • Create a buy/sell agreement that is fair, reflective of the value of the business, and minimizes taxes.
Step 5: Create a Transition Plan 
  • Consider options: outright purchase, gifting, or a combination.
  • If the business is to be purchased, consider financing options including financing from an external party or self-financed from the retiring owners on a deferred payout basis.
  • Establish a timeline for implementation of the succession plan.
Family businesses can avoid a good deal of conflict by engaging in this process proactively and acknowledging that taking these steps to create a succession plan generates worthwhile outcomes. A good succession plan can ensure that family members have the sufficient funds needed to retire and that the business they have built continues to succeed through future generations.