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Will Your Family Business Survive to a Second Generation?

Vol. 25 Issue 5

Post Categories: Law

Here are three questions you should answer now.

According to an oft-cited statistic, only 30 percent of family businesses succeed to a second generation. Why? One major reason is that many owners have not established a viable business succession plan.

In some cases, the business owner has no family members who are interested in taking over, or those relatives are too young and inexperienced. The converse can happen, too: Multiple relatives are interested in succeeding the current owners.

No single plan works for every business. Each family business must consider its specific situation before deciding what is best. In all circumstances, however, there are a few things that all owners must think about when creating their business succession plan.

Who Is Best Suited to Take Over the Business?

This might seem obvious, but many owners forget to take the time to think this through. Consider whether anyone in the family is old enough and experienced enough to take over. Does that person actually want to take over? There are times when the next generation is capable of taking the business over, but would rather not. It is important to have honest discussions now.

Could there be more than one qualified candidate? Leaving the business equally to all your children may sound like a simple solution, but if some are not interested or they don’t see eye to eye, it can be disastrous.

If there is no one in the family ready and willing to take over, it may be best to arrange a succession plan that results in a business partner or a trusted employee assuming command. Or it may make more sense to just sell the business outright to provide for you and your family with the sale proceeds. Having a good succession plan in place can prevent many problems when the time for transition comes.

Does Your Succession Plan Mesh With Your Estate Plan?

Once you have an idea of which person should take over, what comes next? If you have an estate plan in place, you should review it to make sure that it covers the succession plan and creates the appropriate scenario, whether the transition is expected to occur at your retirement or at your death.

A well-crafted trust, for example, will allow heirs to avoid probate—and the expense, delay and publicity that can come with the probate process. A trust can also be used to ensure that appropriate family members or employees are appointed to the company board during a transition or sale. Or even that specific consultants are hired to appropriately value and prepare the company for transition or sale.

You also should consult with your attorney and your accountant to discuss any potential tax implications of your succession plan.

Do You Have a Current Buy-Sell Agreement?

In addition to estate planning, visit with your attorney about your buy-sell agreement, especially if your business has multiple owners.

If you do not have a buy-sell agreement in place, you should consider creating one. A buy-sell agreement will typically address situations like an owner’s death, disability, divorce, bankruptcy or the simple desire to sell an interest in the company.

The agreement addresses how each particular situation is to be handled, prevents one owner from becoming co-owners with someone they would rather not be an owner (such as an inexperienced relative) and helps set a valuation to know the price for a buyout. This agreement can also be a great tool for controlling life insurance proceeds to fund such buyouts.

Take some time now to think about planning for the future of your business to ensure its continued success, even after you are unable to be involved. Nobody regrets starting to plan too early.