Passing the Torch: How to Plan a Successful Transition of Your Family-Owned Businesses

A key challenge facing many entrepreneurs and small business owners – sooner or later – has nothing to do with running the shop. It’s handing the business off to the next generation.

But structuring a transition that will ensure the survival of the company (and the family!) doesn’t happen on its own.

For your reference, five tips for planning – and executing – a successful succession of your family-owned business:

1. Involve the family in key decisions:

“Participation by all family stakeholders in family business decision making also interferes with the success of the family owned company. However, it is both realistic and helpful to obtain the consent, if not the agreement, of family stakeholders to processes for such decision making as well as resolution of objections to decisions, and to bind family business owners to those processes.” (Good Governance – Key to Family Business Success and Succession by Sheehan Phinney Bass + Green PA)

2. Don’t sweep conflicts under the rug:

“… perhaps the single most devastating factor that contributes to the failure of a family business is unresolved conflict in the family. Therefore, any succession planning process must address, head-on, the issue of existing and potential family conflicts. This can be a difficult task. It is also not always possible to identify all existing conflicts or to anticipate future ones. Notwithstanding this bar, the succession plan should endeavor to identify and resolve existing conflicts within the family and establish a process for resolving future conflicts as the ownership and management of the family business passes from generation to generation.” (Succession Planning – How to Effectively Pass the Torch by Dinsmore & Shohl LLP)

3. Include a “worst-case” scenario:

“Planning for an unexpected death or disability generally takes the form of a ‘Buy-Sell’ Agreement whereby another party, such as the business itself, another owner of the business, or a key employee, is obligated to purchase the ownership interest of the deceased or disabled owner… Each business owner should have a “basic” estate plan. A Basic estate plan consists of a Last Will and Testament, a Durable General Power of Attorney, and a Health Care Power of Attorney.” (Business Succession Planning by McNees Wallace & Nurick LLC)

4. There’s no time like the present to start:

“Of course, you can bequeath your business in your will, but transferring your business during your lifetime has many additional personal and tax benefits. By gifting the business over time, you can hand over the reins gradually as your offspring become better able to control and manage the business on their own, and you can minimize gift and estate taxes. (Business Succession Planning by Fred Randhahn)

5. Sometimes the best option isn’t keeping it in the family:

“For better or for worse, advisors to family businesses have generally been guided by a single objective: to help resolve challenging family and/or business issues by keeping the business in the family. Sadly, we know of many cases in which trying to achieve that objective has caused both the family and the business to suffer. Sometimes, as the result of planning, a preferred outcome is to sell the business to a qualified third party and then use the sale proceeds to fund the next chapter in the family’s life.” (Succession: Is Keeping the Business in the Family Necessarily the Best Course? by Ronald Adams)

Related reading: Integrating Various Business Succession and Wealth Transfer Planning Techniques (David Elbaz)

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