Family Business Continuation and Succession Considerations and Strategies

May 26, 2010 by Frank Goley, Business Consultant

What makes a family business unique, and quite often is the key to its Competitive Edge is its close family connections, experience and expertise.  In order to sustain this unique edge, a family business needs to plan early, carefully and thoroughly so successors can be developed and groomed from the family ranks.

Succession Issues

§  Treating all family children fairly

§  Reactions from non-family employees

§  Family communications and conflict

§  Estate Taxes

§  Executive and Management level organization and structure

§  Determine how best to select successors:

o    Groom one child from an early age to take over?

o    Allow family members to compete and choose replacements and successors with the aid of the Board of Directors and/ or the Family Council?

o    Choose successors without the aid of a third party?

o    Form an Executive Committee of family members (3-5members)?

o    Allow the children and/ or family as a whole to choose incoming leaders?

How to go about choosing future leaders and successors really is a factor of a particular family business’s history, current structure, planning, success, future growth forecasts, available resources (human, technical, strategic and financial), aspirations, goals, wishes and a host of contingent variables.  The complexity of succession issues really dictates the use of an experienced Business Consultant, Attorney and Accountant to help develop and implement a successful Continuation Plan.  The Business Consultant should be the quarterback of the planning process:  he or she should coordinate the inputs of the current leadership, Board of Directors, Family Council, key non-family employee, legal, human resources and accounting; along with the Consultant’s experienced advice, to come up with an acceptable, flexible, successful Business Succession Plan.

A Business Consultant can be a great investment when replacement choices are limited.  If faced with this challenge, a family business needs to utilize professional help to:

ü  Analyze present key position assignments, responsibilities and performance to determine current capabilities and weaknesses, as well as, future succession management and leadership gaps.

ü  Take a Close look at the current company structure and determine if the structure needs to be modified to meet future human resource challenges.

ü  Do present family members need cross-training, leadership education and mentoring?  Or are there key non-family employees who can fill future leadership gaps?

In order to find a solution to a leadership and management future gap threat, it is important to have sound, objective, experienced third-party professional advice and expertise at hand.  Moreover, all present managers and key people, family and non-family, should be included in the decision making and planning process when replacement choices present an inherent challenge.

Business Continuation and Succession Planning

In a family enterprise, succession occurs when the family business owner/ leader/ founder passes away, becomes incapacitated, exits the company or retires.  You can never start too early in planning replacements; along with succession and continuation contingency planning.  Having explained the various areas and issues to consider when planning for future Company leadership and management, we will now examine the importance of Operating Authority Planning; how this authority will pass from one generation to the next when planned for, as well as, putting in place emergency, contingency authority planning when the family business’s leader and/ or top management suddenly departs.

Ø  Sudden Departure Planning:  Sudden death or incapacity in a business’s upper leadership echelon can be paralyzing if not properly planned for.  It is very important to consult an experienced Certified Financial Planner, Estate Planning Attorney and Business Accountant to ensure a Business Continuation Financial Plan is in place, which sets up the necessary wills, trusts, insurances, investments and other vehicles to ensure the business can have a successful financial transition.  This is often accomplished with Key Person Life Insurance and Disability Insurance.  It is very important these advisors work in concert with the Company’s Business Consultant, Financial Consultant and Business Attorney so that the Business Succession and Continuation Plan link both Management & Leadership Planning with the Operational Authority Planning.

Ø  Planned Departure Planning: As previously discussed, there should be a Leadership and Management Continuation Plan in place.  This ensures a smooth transition and can be overseen by the Company’s Board of Directors.  This Departure Plan will kick in automatically with the Operational Authority Plan if a sudden, unplanned Leadership Departure occurs.  The Continuation and Succession Strategy should be implemented in stages so the existing Company leader can ensure a smooth transition.  Having finances in place to take care of any dips in sales and profits during this transition is key and should be part of the plan. It is important that the outgoing Company leader can retire comfortably and has a retirement life plan in place.  When it is time to go, according to the plan, the family Company leader must cleanly go and not hold on.  It is time for the next generation to move the Company forward.  A Certified Financial Planner and Compensation Structure Expert should be consulted to determine the best way to set up a successful Retirement Plan for outgoing family members- their retirement comfort is key toward continuing a clean break from the business.

Ø  Selling Stock to Family Members:  A successful transition is only complete when the outgoing business leader/ owner sells his stake in the business to the remaining family members as per the Operating Authority Plan.  The advantages of this type of transition are numerous:

ü  Business remains in the family.

ü  Business continues to provide a source of steady employment to family members.

ü  The family’s status and stature are preserved.

ü  The former owner/ leader is freed up to actually retire and travel.

ü  A successful successor(s) instills confidence and happiness throughout the family.

ü  Strengthens family bonds rather than causing additional friction and conflict.

ü  Future success rewards the family very well financially.

Ø  Selling the Business Option:  After several generations, sometimes family contracts or its members choose alternative careers and businesses.  It is better to sell a successful venture than one withering and dying on the vine.  This option should be included in the Operational Plan and be well thought out, utilizing the expertise of a Business Consultant, Registered Investment Advisor, Valuation Expert, Business Broker, Attorney and Accountant.  If planned for properly, a business sale can be a great thing for a multi-generational family.  The proceeds and resulting investments can secure future education funds, new business ventures, philanthropic organizations and other generational family interests and passions. 

§  Some things to consider when selling the family business:

ü  The business owner/ leader ought to plan a transition period into the business sale process.  An immediate retirement can reduce a Company’s attractiveness to a buyer as having the founder/ leader/ owner around during the transition is often preferable. 

ü  Utilized Valuation Experts and Accountants to evaluate assets, project profitability and determine good will mark up, among other value determinants.  A prestigious accounting firm conducting a full audit and investigator go a long way in deriving a premium sales value which is acceptable to the buyer.

ü  Building up profits, retaining earnings and instituting cash flow management strategies can go a long way to attracting good buyers.

ü  Structuring the deal with the family retaining a small, passive stake in the business can be very attractive to a buyer as it instills confidence in the new leader and management, while giving the family the opportunity to profit from the Company.  This can also make a premium price structure more palatable to a buyer.

ü  Shift assets to heirs to lower your basis in the business, thereby, decreasing and spreading out the tax load.

ü  Ensure financial records are up to date and audited with projections tending to air on the conservative side, while having realistic marketing outlooks and inherent assumptions.

ü  Need to understand what you and your family members will lose from the sale and plan accordingly with your financial advisors.  Things to consider:

·         Pension/ Retirement Investment Plan

·         Stock Plan

·         Health, Life, Disability & Long-Term Care

·         Company cars·         Club dues

·         Perks & Benefits

ü  Tax implications can be substantial in a business sale so utilize a good tax planning firm, along with garnering advice from your Certified Financial Planner.

Tax and Estate Planning Implications

One of the biggest threats to the successful continuation and succession of family businesses are the constantly changing tax laws.  Utilizing an experienced Estate Planning Attorney, Tax Attorney and Business Attorney, along with a solid Business Accounting Firm, to ensure you not only maximize present profits while minimizing your tax liability, but also successfully plan to pass your estate and business onto heirs in the most tax preference way.  Some Estate Planning considerations to keep in mind while planning for business continuation and succession:

Ø  Major concerns typically are the perpetuation of the business and maintaining liquidity.  Without sufficient cash to pay estate taxes, heirs have little choice but to drain cash from the business when it most needs it or worse, be forced to sell it or sell many of its prized assets.

Ø  Good Estate Planning can:

ü  Reduce the need for beneficiaries to remove funds from the business.

ü  Maintain beneficiaries’ interest stakes by keeping funds in the Company.

ü  Provide a smooth transition when developed in conjunction with the Management/ Leadership Strategic & Succession Plan and the Company’s Operating Authority Plan (see previous sections for more details).

Ø  Selling the patriarch’s / matriarch’s stake in the business, in advance of any Succession Plan implementation (whether a planned or sudden departure) to family members can be the best estate planning a family business can employ, while giving the business leader control of the Company until the agreed upon relinquishment.

Ø  There are a host of structural tools which can be used to minimize estate tax liability, that should be fully explored with your Financial Advisory Team, such as:

§  Gifting

§  Stock Sales

§  Trusts

§  Limited Liability Corporations

§  Family Limited Partnerships

§  Share holder Buy/ Sell Agreements

Ø  Critically Important:  Establishing a valuation of the business which is in compliance with IRS regulations is critically important.  Overvaluing, as well as, undervaluing a business for tax purposes can both be highly expensive mistakes.  This is why having an excellent Tax & Financial Team of Advisors in place is absolutely essential.


Not everything can be planned for, but if you adopt the strategies prescribed in this article, which are commonly unique to a family enterprise, running and managing the successful family business is significantly improved, while ensuring successful next generation business continuation and succession.  Family Businesses have a unique set of Competitive Advantages, which if planned for, can be used to exploit new markets and ensure future profitability and success.  In the end, if you, the family business owner / founder / leader successfully plan, build and manage the family enterprise, you will need to give up control and ultimately ownership in your cherished accomplishment.  If built well, the family business will continue to reflect the leader’s / founder’s ambition, innovation, initiative, entrepreneurship, character, values, integrity, ethics; all those things in testament to hard work and perseverance.  This is the legacy of the business, clearing the way for future generations.

Posted in Business Leadership, Business Management.

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