Succession Planning in Family Business

Chris,

My kids want to kick me out of the business I started 30 years ago. This is causing a lot of trouble in our family but I am not ready to retire. How is this handled in other family businesses? Can you help us?  

Succession Planning Can Save Your Family and Your Business

It's hard enough to own a business. Family businesses come with an added set of problems. Will the kids come into the business? Or, is there one child who wants to take over? Are you already in a partnership with other family members?  Do you plan to give your business interest to a successor or will you sell your interest? Will you retire at a certain age or 'when you're ready'?

I get a lot of heartbreaking calls about succession planning, or lack thereof, in family businesses. When there is no plan, the kids can get restless and that can lead to a sad fracture in the family. But a rift is avoidable with a little planning. I have a hard time grasping why a parent wouldn't want to see their own child take over and grow the family business.

Why Make a Formal Succession Plan?

Think about it from the perspective of your successors. If your daughter, for example, has been working in the family business for many years, probably for less money than it would cost to replace her, she’ll want to know if the business will ever be hers. If you have other kids, they’ll want to know what their position in the business will be. As your kids get older and have kids of their own, they’ll want to plan for their future. That uncertainty can create a lot of tension in the family. In my work, I have seen some awful situations. Families can be torn apart by the uncertainty of what you, the founder, intend. Making a formal plan can, done correctly, prevent a lot of hurt.

Let’s dig into what goes into a succession plan for a family business.

How to Make a Succession Plan

Look, I understand that you are probably not dealing with a massive enterprise with billions of dollars at stake. Your plan must be practical and reasonable. Your son or daughter is not going to write you a check for $100 Million to buy the family business from you. You want to design a plan that meets your needs and makes it possible for your designated successor to succeed. A plan is a roadmap to the preservation of your legacy. Let’s look at how to plan for the next generation of your family to run your business. It’s never too early to make a succession plan and the earlier you start, the more options you have.

Step 1: Decide and Agree to Make a Plan

Sounds obvious but few family business owners do this. It’s never a good time and they’re never ready to “let go”. Making a succession plan does not mean your career is ending. People see it like making a will. They wait until age is a factor and then they scramble to “balance the ledger”. Your first decision is to decide if your heirs will participate in the planning process or if you will develop a plan and present it. This depends on the age and desires of your successors. Older, competitive children might not do well working together on a plan. It might be better to draft it and present it at a family meeting. Just decide that you will make a plan.

Step 2: Is This A Time Certain Or Readiness Based Plan

If you want to hand over the business when you turn 65, that would be a Time Certain plan. Or, you might say that in 10 years your son will take over the business. If the transition is based on time, it would be a Time Certain plan.

Or, you might decide that once there is a certain amount of money in a retirement account, you’ll step down and your daughter will take over the business. You might make a plan that will turn the business over when your daughter is ready to assume responsibility for the business. If there are some definable circumstances under which you’ll be ready to hand over the reins, we would design a Readiness-Based plan. One thing to be careful of is making the circumstances clear and precise. We don’t want to say, “When my son is ready, I will put him in charge.” He’ll never be ready enough in your eyes. It’s much better to have metrics that your son can work toward. “When he completes the requirements for his license.” “When he is able to completely able to manage a project from start to finish.” Or, “When I can be away from the business for a solid month and he runs the store without major issues…” Things like that can be measured and demonstrated. Just make sure you can define when your successor will take over.

#3 Members/Parties to the Succession Plan

If you intend that one of your children should take over the business, you’ll need to put that in the plan. Will the deal be available to all your children? If your child is not interested in the business, you should include the option to offer the business for sale to a third party. This is a very difficult decision for most parents. But, that’s the benefit of making a plan. You’ll deal with this issue now and not when you’re 80 and want to retire but the business is pulling the family apart. Decide now. If you want all the kids to get the business, that can be done.

#4 The Terms of the Deal

Now we need to think about the terms under which you will turn the business over to your successor. Will your interest in the business be purchased? Or, will the business “redeem” your interest by making a payment to you?
Obviously, if we say that once there is sufficient funding in a retirement account, we’ll turn the business over to the next generation, and that account will fund the buyout. Maybe you need money for your retirement years but your kids are not able to buy the business from you. Not a problem. We can develop an Employment Agreement that gives you a salary for a period of time. You can work as much or as little as you would like while drawing a salary from the business. Employment Agreements can help a lot with taxes and cash flow. Structured correctly, it will not burden the business.

Sometimes, people have made enough from their business to be able to gift it to their children. Whether you “sell” the business to your successor or gift if is entirely up to you. Regardless of the terms, you will save a lot of stress on your family by getting this defined.

#5 Partnership Agreement

This might be the most important part of your succession plan. Unfortunately, I’ve been called into some very ugly feuds between siblings who are supposed to be sharing a business. It is cruel to put the kids into business without a Partnership Agreement that defines their roles, responsibilities, and compensation. And, if you will continue in the business in some role, what does that look like? What if the kids just cannot work together? How do they resolve that? Can one buy out the other? Do you return to the business?

In every case I’ve ever seen where the partnership in a family business is working great, there is a well-designed Partnership Agreement.

Summary

Defining a Succession Plan for a family business is a good way to prevent serious disputes from tearing the family apart. I’ve seen siblings who refuse to talk to each other and kids who refuse to be in the same room with their parents. That can be avoided with a succession plan for your business.
As a mediator who has seen the pain of not having a plan, I’m ready to help you think through a plan that you can be proud of, a plan that protects your family and your legacy.

If you would like help and guidance to prepare a Succession Plan for your family business, contact me directly. I'll explain the options, answer your questions, and provide rates based on your situation.

"You want to design a plan that meets your needs and makes it possible for your designated successor to succeed. A plan is a roadmap to the preservation of your legacy.​"

Chris Reich, Business Partnership Mediator