The Dynamics CEOs Should Consider when Passing Down the Family Business

For many family businesses, creating a meaningful legacy is critical to sustaining the life of the organization. According to a 2016 U.S. Trust Insights on Wealth and Worth Survey, four in 10 entrepreneurs have family members involved in their business, and most see the involvement of family as a competitive advantage. So when it comes to succession planning, deciding whether to keep the business within the family or pursue an alternative route can be both an emotional and strategic process.

Many factors can influence the transition, including family dynamics and if multiple family members are involved with the company. Whether transitioning to a family member (or members) or an outside buyer, communicate your goals for the company with your family members regularly and consider seeking outside help in doing so, such as hiring a professional coach.

What factors should be considered if the family wants to remain involved?
A business owner shouldn’t assume the next generation will take over the family business. However, exposing your children to the company at an early age and encouraging them to attain education and skills relevant to the business will help you determine early on whether they have the aptitude and interest to one day run the company.

Once you have confirmed your family’s interest in remaining involved, consider whether succession will be based on birth order, experience, or interest. In situations with multiple family members, consider joint ownership and roles for each family member that will help the business grow while putting everyone’s best skills to work. Having a board with nonfamily members can be helpful in professionalizing the planning process, and provide an outside perspective and new contacts for the business.

“A BUSINESS OWNER SHOULDN’T ASSUME THE NEXT GENERATION WILL TAKE OVER THE FAMILY BUSINESS.”

How can business owners plan for a successful exit strategy?
While easier said than done, don’t let day-to-day responsibilities of managing your business prevent you from setting aside ample time to create an exit strategy, as it’s an essential component to maintaining your business for the long-haul. Building an exit strategy requires two distinctive, but intertwined, plans: a succession plan and an estate plan. An estate plan, including creating a will, naming an executor, potentially creating various trusts and determining beneficiaries ensures that your personal assets are handled responsibly and equitably. Without these plans, you’re hoping someone else will interpret your intentions.

It’s important to have a team of professionals and trusted advisors in place as part of preparing an exit strategy. A comprehensive team to help you through a sale can include a private banker, investment banker, accountant, transactional lawyer and business appraiser among others. A good place to start is by obtaining recommendations from existing advisors and friends. You should interview multiple advisors and bankers, focusing on their experience, contacts and industry knowledge.

Succession planning should be an ongoing process that is shaped by events, milestones and life occurrences. Rather than a one-time need, view succession planning as a flexible framework that allows individuals and families to adapt and grow. Because laws and tax structures change, estate plans need to adapt, too. Your plan doesn’t have to be static, but instead, it can serve as a guide that will likely change as your needs evolve.

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