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Is Succession Planning Necessary for Family Business Entities?

Is Succession Planning Necessary for Family Business Entities
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While 88% of business owners believe their family will control their business in five years, statistics from Family Business Institute show that only 33% of businesses survive to transfer to the next generation, and only 10-15% continue to the third generation.

Failing to have a succession plan is often why family businesses do not survive across the generations. According to the article “Planning for Success: How to Create a Suggestion Plan” from Westchester & Fairfield County Business Journals, creating, designing, and implementing a succession plan can protect the family’s legacy.

Start by establishing a vision for the future of the business and the family. What are the goals for the founder’s retirement? Will the business need to be sold to fund their retirement? One of the big questions concerns cash flow—do the founders need the business to operate to provide ongoing financial support?

Next, lay the groundwork regarding subsequent generation management and the personal and professional goals of the various family members.

Several options for a successful exit plan include:

  • Family succession—Transferring the business to family members
  • Internal succession—Selling or transferring the business to one or more key employees or co-workers or selling the company to employees using an Employee Stock Ownership Plan (ESOP)
  • External succession—Selling the business to an outside third party, engaging in an Initial Public Offering (IPO), a strategic merger or investment by an outside party.

Once a succession exit path is selected, the family needs to identify successors and identify active and non-active roles and responsibilities for family members. Decisions need to be made about managing the company in the future.

Tax planning should be a part of the succession plan, which you must align with the founding member’s estate plan. How the business is structured and is to be transferred could either save the family from an onerous tax burden or generate a tax liability so significant as to shut the company down.

Many owners are busy with the business’s day-to-day operations and neglect to do any succession planning. Alternatively, a hastily created plan skipping goal setting or ignoring professional advice occurs. The results are bad either way: losing control over a business, having to sell the business for less than its actual value, or being subject to excessive taxes.

Every privately held, family-owned business should have a plan to establish what will happen if the owners die or become incapacitated.

An estate planning attorney who has experience working with business owners will be able to guide the creation of a succession plan and ensure that it works to complement the owner’s estate plan. With the proper guidance, the business owner can work with their team of professional advisors to ensure that the business continues over the generations.

Reference: Westchester & Fairfield County Business Journals (March 31, 2022) “Planning for Success: How to Create a Suggestion Plan”