Transitioning a family-owned business to the next generation involves planning, communication, and dedication. Done well, it can pay dividends, including helping you plan for and transition to retirement and set up the next generation for enduring growth.
Business owners who want to hand down a company to the next generation have all sorts of reasons—funding a retirement, continuing a business, providing opportunities for family members. What they may not realize is how long it takes and how many conversations they’ll need to have. In fact, starting your succession planning a decade before you hand over the reins to family isn’t out of the question.
Where are you on your family succession planning journey and what steps can you take next? These tips can help.
Identify your family succession goals.
Begin the conversations—early.
Maybe you own an accounting firm, and have a kid who loves numbers—a natural opening for discussing business succession. But a potential successor doesn’t need to be good at what you’re good at to be interested in and a solid fit for business leadership.
What you don’t want to do is make assumptions or make a mandate. Family succession is an opportunity to talk about the business, gauge interest, and share history and challenges with potential family owners—the earlier the better.
In these discussions, it’s also helpful to think about what’s called “merit versus inherit.” Merit equals interest plus skill building. It could be a training path or job requirements—say, working at an outside firm for a number of years—before a transition can begin. Be clear of your expectations and get clear on theirs.
Share your goals for family succession.
There are more than 33 million small businesses1 in the country, all of them started for different reasons. Maybe you began yours because you wanted to be your own boss. Or perhaps you had an idea for a product or service that you wanted to share with the world.
It’s the same with family succession: You have a different reason—or reasons—than someone else. Often there’s an emotional motivation, like wanting to guarantee the continuity of your business. You may also have family members who have demonstrated interest, making it a good opportunity for them to find a rewarding career. Or, financially, transitioning to the next generation may provide practical benefits for them and for your retirement depending on how you structure the sale or gift. Whatever the combination of reasons, make sure you’re clear on the “why” behind a hoped-for family succession.
Ask your family to share their goals for the succession.
Nearly three out of four family businesses—72%—say that they want to ensure family succession. But only about half say there is alignment on company direction.2
Translation? Your goals may be different than those of potential successors. That can either lead to disagreement and hurdles for the transition and future of the business, or can be the start of an open, honest discussion about possible change and growth.
Implement the plan.
Identify professionals to help.
Insights from outside professionals such as a financial professional, attorney, and tax advisor can help analyze issues, including financial implications for you and your heirs. For example, if you began the business as a sole proprietorship, should the new owners transition to a different structure, such as partnership or S corporation?
Include retirement planning as part of succession planning.
A key component of a successful plan is balancing your income needs with the income needs of your successor and the long-term success of the business you built. That involves an assessment of your current retirement savings and potential retirement budget. Do you hope to draw some retirement income from the business? If so, you may retain some ownership in the company. A financial professional can help with options.
Communicate with family outside the sale.
Whatever your reasons for transitioning a business to family, your success may depend largely on how effectively you talk about your expectations and specifics. That communication and planning needs to include family that will take over the business, and those who will not.
For example, if you’re giving your business to one child and it represents $2 million in value, don’t assume you should give $2 million to each of your other children. While $2 million may be an equal figure, it may not be an equitable figure. The child with a $2 million business must assume all the risk and work necessary to capitalize on that value—and already may have invested years of equity as a leader in the business. That “gift” is much different than $2 million in cash.
Prepare for the transition.
Create a plan for employees.
To retain talent—especially key employees—you’ll have to be transparent about the transition and your role going forward. You may want to consider specific levers, such as a nonqualified deferred compensation plan,  to help keep key people and provide consistency for the business and customers.
Think about how to replace yourself.
As your business has matured, your role has, too. Your family members may need time to grow into the roles they’re taking over. Or they may be assuming ownership with different skill sets—meaning there will be a void (your role) that has to be filled. Does that mean promoting from within, or hiring someone new? The goal is to ensure the next generation has the support they need, now and in the future.
Envision your role during and after succession.
Are you the type of business owner who can truly step away from the company you’ve built—a big part of your identity—and let somebody else run it? Business successions are measured in years, not months. You may need to invest more time in mentoring your successor or helping them build up funds for a down payment to buy the business. Maybe you’ll work part-time and still draw a salary to ease yourself into retirement—both emotionally and financially. You could gradually transfer ownership shares as part of an extended succession.
Share and review the plan. Adapt. Then do it again.
Plan for regular updates on how the business is doing, how far along in the transition you are, and what challenges or bumps you have faced. There may be unexpected challenges along the way. Consistency in your check-ins can help provide a mechanism to address them.
What’s next?
Have you considered an informal business valuation as a first step in succession planning? Your financial professional can request one for you from 51łÔąĎşÚÁĎ. See more in our business-owner FAQ. Your financial professional also can request a family business planning report () for a personalized look at buy-sell and succession strategies, retirement income, and legacy and estate planning.
