Family Business Succession Planning

A family business is more than a source of income. It can also be a source of connection, a source of pride, and a legacy to hand down to future generations. But like passing the baton in a relay race, the successful handing off of a family business to the next generation only looks easy; in reality, it takes careful planning and calculation.

Family businesses are worth preserving, and not just for the families that run them. Family-owned businesses:

• Employ 60% of the U.S. workforce
• Create 78% of all new jobs
• Generate 64% of the U.S. Gross Domestic Product (GDP)

In short, family-owned businesses are the lifeblood of communities and the country. But what happens when the owner of a family business dies or needs to step down? Without a business succession plan in place, the odds are that the business will not survive into the next generation.

Obstacles to a Successful Family Business Succession

According to research published by the Family Business Institute, only 30% of family businesses survive to a second generation. Fewer still—only about 12%—survive to a third generation of ownership. And nearly half of all business owners who plan to retire within the next five years don’t have a successor lined up. Without someone to pass the baton to, so to speak, the business may have no option but to shut down.

But succession planning means more than just having an intended successor waiting in the wings. Often, there needs to be a gradual shifting of responsibility, both so that the older generation can feel confident that their legacy is in good hands, and so that the younger generation can feel competent carrying that legacy forward. Many small business owners are so occupied with running the business that planning for transition takes a back seat, even when the younger generation is eager to take on a larger role. If the business owner dies or is forced to retire suddenly for health reasons, the new owner may struggle after being thrust into a role for which they are not prepared.

Then there is the reality that a family business necessarily involves family dynamics. The older generation may see the younger as “kids” who aren’t ready to take over without supervision, causing the younger generation to question their own readiness and competence. Or a frustrated younger generation may be hungry for more agency and authority in the business, butting heads with an older generation that is resistant to change and new ideas. There is also the possibility of long-dormant sibling rivalry rearing its ugly head as siblings jockey for position in a transition.

All of these factors mean that business owners cannot simply step aside when the time comes and assume that their chosen successors will step in, step up, and keep running the business without disruption.

Creating a Business Succession Plan

The first step in creating a business succession plan is to speak with an experienced estate planning and business succession lawyer. Not only do most business owners not know the legal requirements for a successful transition, it is likely that they have never had to plan for one before. An attorney who is familiar with both estate planning and business law will have the legal knowledge and the practical experience to get the process moving.

Your attorney will help you address the estate planning implications of your succession plan, such as how to treat your heirs equitably in your estate plan if one inherits the business and others are not involved in it. An attorney can also connect you with other professionals, such as financial and business advisors, who can help navigate issues such as business valuation and the tax implications of the transition.

The best time to begin your family business succession plan is years before you need it. The second best time is now. Think about whom you’d like to have take over the business. Are they currently working in the business? If not, are they willing to? What skills and training do they need to make them ready on “day one?” Is there time for that gradual shifting of responsibility from your shoulders to theirs so that you can both feel good about the transition?

Transparency is key when planning for the succession of a family business. Failing to be clear about your plans, goals, and concerns can damage not just the business, but family relationships. Make sure family members know what you are planning, and why. The last thing you want is for a child who has poured years into the business, assuming they would take it over someday, to suddenly discover that you chose their sibling or cousin as your successor instead.

Work with an Experienced Business Succession Planning Attorney

If all of this sounds overwhelming, remember that the first step to creating an effective business succession plan is the only one you need to take alone: contacting an attorney. You’ve worked hard to build and sustain your business. Now prepare it, and your family, for continued success in the future.