Planning for Succession in Your Business

older and younger man in construction hats looking at tablet

Family businesses comprise approximately 90% of the businesses in the United States. Yet only about one in three survive to the next generation and one in ten to the third generation. Why? The closely-held family business often fails for the same reason that it originally succeeded. It relies on its uniqueness - the compassion and loyalty among the family members not present in other companies - to generate a dynamic viability to the company. Yet this uniqueness may also lead to distrust within the family and disruption of the family business as an ongoing entity. To prevent the demise of the business, the family should create and implement a strategic business succession plan. This plan should integrate business, tax and liquidity considerations with the emotional and financial needs of the family and the needs of the business to achieve continuity and growth for the future. The goals of a business succession plan for each family are unique to that family, but center around several core determinations. The family must decide:

  • Who will be the future owners? Will they include key employees? Will they include only family members participating in the business? Who of the owners will retain control?

  • How and when will the owner transfer control? Will the business be transferred to the next generation? Are there capable leaders, whether or not family members, to own and manage the business in the future? Or will it have to be sold? Will the business survive the imposition of estate taxes at the death of the owner?

  • How will the family harmonize business and family needs? Does the family recognize that the needs of the business to grow, adapt to changes in the marketplace and aggressively face challenges are different from the needs of the family to remain compatible and unified? Will the family remain compatible if certain members receive greater rewards for their participation in the business and what can be implemented to equalize, to the extent possible, the rewards?

  • How will the family successfully integrate its personal values and relations into the business without disrupting the ongoing needs and growth of the business? Do the family members communicate among themselves regarding these values and business goals?

  • Who will manage the business in the future? Who will control the selection of management personnel and what rights will exist to change management? Will management have too much control? Will management be able to continue operating the business as a viable, successful entity without interruption or demands from family members not involved in the business?

With a general consensus on these core determinations, the family can begin to create its strategic business succession plan. It is often in this planning process that the family will flesh out the answers to some of these questions.