Business Succession Planning Part 1: Transitioning the Family Business to Children

Business succession planning is more of an art than a science.  As many Americans are reaching retirement age, more and more businesses are reaching the transition phase.  For some family business owners, children are waiting in the wings to take over the business.  For others, transitioning the business to family is simply not an option.  

 Over the next few weeks, we will be sharing a series of blog posts covering various business succession planning topics. To kickstart the series, here are three things for business owners to consider when children are poised to take over the business.  

 1.    Are your children prepared to step-in and take over the business?  

 While children may be active in your family business, they may not be shadowing your day-to-day activities as a business owner.  It is important to be transparent with your children. Share the company’s financials, help children build relationships with your most important clients, and involve them in ownership operations and employee issues. 

 Ask your children how they would handle specific problems that arise, and let your children know why you would handle things differently. You may also want to get employee input on your children’s leadership abilities—after all, continuity of employees is a key factor in the continued success of the business after you retire.

 Your role in this part of the analysis is to determine whether your children are ready to assume ownership immediately, or if you need to slowly transition out of ownership over a series of years as you help your children adopt an owner’s mindset. 

 2.    If you have more than one child in the business, are they all bringing as much to the table?

 You may have multiple children involved in the family business, and your children may be drastically different when it comes to their strength and weaknesses.  Some children may be great at sales—others may be great at operations—and others may simply see the business as a passive investment opportunity.  

 Your business succession plan needs to identify those children who give your business the best opportunity to succeed.  By transitioning ownership to your children over time, you have the ability to grant ownership to your children based on the specific value each child provides to the business.  Once you’re out of the business, buy-sell agreements can be used to help resolve deadlocks among your children or force a child to sell his/her interest if he/she is no longer active in day-to-day operations.  

 Giving one child more of the family business doesn’t mean that your children must get unequal shares of your estate.  Life insurance or other assets can be used to equalize benefits to your children. Your estate plan is an essential piece of your overall business succession plan.

3.    How do you structure the sale of your business to the next generation?

 The majority of family business wealth is tied up in the family business itself. This can create problems for selling your business to your children, who may be saddled with student loan debt, a mortgage, or college tuition costs for their own children.  

 When selling your business to your children, it is important to structure the sale to meet the needs of both you and your children.  The sale can be structured so that monthly payments by your children are satisfied from the cash flows of the business, while you receive an income stream that satisfies your retirement goals.  The sale of the business should also be based on a legitimate business valuation to avoid potential estate and gift tax issues. Many banks and financial advisors have special resources to assist family businesses with the transition of ownership from generation-to-generation.  

 Let us know if we can help you develop a family business succession plan.