How To Successfully Transition A Family Business


Family businesses face the same challenges as other businesses, including succession planning. But the family dynamics can make those transitions even more complex.

Many family businesses don’t survive those challenges across multiple generations. “About 30 percent of companies make it to the second generation without being sold or failing, about 12 percent make it to the third generation without being sold or failing, and only about 3 percent make it to the fourth generation. So the stakes are high,” said Devin Lemoine, owner and president of Success Labs, a leadership development and management consulting firm.

Lemoine; Linda Perez Clark, a partner at law firm Kean Miller; and Jeremy Klibert, a partner at CPA and business advisory firm Faulk & Winkler, teamed up to share valuable information on succession planning for family businesses. Here are some of the key takeaways from their discussion.

Get Your Plan Down on Paper

Succession planning can be a difficult topic, because it means candid discussions involving death, finances, business management and who will — or will not — be involved in the business. But even though it’s easy to avoid tough conversations when things are running smoothly, it’s important to take the plunge and start sooner rather than later.

“It’s a marathon. You have to start years in advance on your succession planning for it to be effective, “ Clark said, adding that succession planning should address both business succession and ownership succession.

For business succession planning, she says, you should consider things like “What is the path forward for management and operational continuity?” and ”What vehicles and structure do you have in place to ensure continuity in terms of business operations?” And she suggests having clearly defined succession-planning responsibilities, such as for board members or a specially formed committee, to ensure that someone takes on this task.

For ownership succession, Clark suggested shareholders agreements, partnership agreements and operating agreements for different ownership setups. These agreements should include buy-sell contingency clauses for different events to avoid confusion or bitterness between family members when there is a need to implement the succession plan.

Consider the Tax Implications of Your Moves

Klibert noted that ownership succession planning needs to incorporate tax planning.  “If you don’t do the proper planning, you may be hit with some huge estate taxes down the road,” he says.

Estate taxes currently have a lifetime gift exclusion of about $5.5 million for single filers and about $11 million for joint filers, so this might be a good option for transferring ownership of businesses valued below those exclusion totals. Such transfers can be phased over several years, gifting equity to a successor annually as the owner gradually distances himself or herself from the business.

A sale to a third party is another option, although Klibert noted that the tax ramifications for that can vary for different types of sales. For example, in a stock sale the owner sells the business’ equity and generally is subject to a capital-gains tax rate of 15 or 20 percent. However, in an asset sale, accounts receivable and inventory that are sold are taxed at ordinary income rates, which could be much higher than capital-gains rates, but intangible assets like goodwill or a customer list are taxed at the capital gains rate. This can affect a sale negotiation, as the seller will want to be taxed at capital-gains rates but the buyer will want an asset sale so they can enjoy the tax benefit from depreciation and amortization of the assets.

Don’t Forget the Human Side

Successful handoff from one generation to another is about more than legal documents and tax planning, though. It’s also important to consider the needs of the people who are expected to pick up the baton and run with it.

Lemoine said it’s important for the family business to establish the ground rules. Family businesses should consider creating a family charter with agreements about family core values, the rules for employing family members, the transfer of ownership of stock, profit distribution, and a protocol for resolving conflict, she said. “Because conflict is not an ‘if’, it’s a ‘when.’ ”

It’s a good idea to have an understanding of the expectation of family members joining the business, too. Some family businesses decide family must have experience working somewhere else before joining, while others insist that family members start at the bottom and work their way up just as any other employee would, Lemoine said.

“When you think about who’s going to run the company, you really do have to think about ‘who are the best people?,’” Devin Lemoine said. The best family businesses are able to make an honest assessment of who is the best leader for the company and are willing to accept that that person may not be a family member.

The family business should appraise a potential successors strengths, weaknesses, critical competencies, skills, experiences, and relationships. Using this evaluation, succession planning should involve creating a development plan that includes a means to fill in any gaps that may be missing, Lemoine said.

Lemoine says part of being able to implement this plan involves being comfortable becoming a “lame duck.” The current leader has to be able to back away while new leadership moves forward. To pave the way for a successor, a leader will have to spend less time leading and more time developing the successor. This can be hard for a person who has dedicated his or her life to growing a business, but in order for the business to continue to thrive, that person will have to get out of the way so the successor can take over.

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