Succession Planning for Family-Owned Businesses

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An important, but sometimes overlooked, component of an estate plan for family-business owners is a succession plan for the continued management and operation of the business after the owner is no longer involved with the company. Most family-business owners intend for their businesses to survive them and believe their children will succeed them. However, not many have a plan in place for their exit and for their successors to take over. As a result, few small businesses survive to the next generation.

While tax planning is an important aspect of a family business owner’s estate plan, planning for the succession of management and operations of the business should not be neglected because it will directly affect the success of the business in the hands of the next generation. In family-owned businesses, developing a succession plan for management has even greater importance as family dynamics can greatly impact the management of the business as the next generation attempts to take over. While having the general goal of passing the business on to the owner’s children is a good start, the owner’s exit from the business should be thoroughly planned to reduce conflict and ensure the success of the business. A thorough succession plan is especially important for family-owned businesses as the emotions involved can amplify conflict and reduce the likelihood of the business’s survival after the owner departs.

Just as estate planning should be started early, so should the development of a succession plan for a family-owned business. The need for a successor to step in and run the business may be gradual, such as when the owner retires and hands off the business to his children. But, it can also happen suddenly if the owner dies unexpectedly or becomes disabled and must retire sooner than expected. To help their businesses survive them and continue on for generations, owners should start planning for their exit and for others to succeed them well before they plan to depart from the business.

An initial step in developing a succession plan for the management of the business is to identify successors who are both desirous of one day operating the business and who will be able to competently operate the business after the owner departs. While an owner’s children may not presently be able to take over the business because of a lack of experience or expertise, identifying potential successors early on will allow the owner to help her children gain the experience and expertise necessary to manage and operate the business. The owner’s children can gain experience as an employee working under the owner or other managers, and they can gain expertise pursuing a business degree or other degree relevant to the focus of the business.

Additionally, an owner should also identify key employees who are presently capable of managing and operating the business. While an owner’s ultimate goal may be for her son or daughter to eventually succeed her, not having an immediate successor in place can be disastrous for a family business if circumstances require a successor to step in for the owner on short notice. An owner may also discover that none of her children desire to succeed her in managing and operating the business, and then the owner must look to key employees as successors.

While an owner may be disappointed if her children are uninterested in carrying on the business, such a situation does not mean that the business cannot survive the owner or that the owner’s children cannot still become owners. Even if the owner’s children do not succeed her in managing and operating the business, ownership of the business can still be transferred to her children, while the management and operation of the company remain the responsibility of key employees capable of operating the business. Adequate compensation, authority, and responsibility for key employees then become a critical part of a succession plan, as retaining key employees will be necessary for the business to survive.

As a final consideration, developing a thorough and detailed succession plan will involve not only trusted advisors such as attorneys, accountants, and business consultants, but the owner’s family members and the key employees affected by the succession plan should be involved in developing the plan and should be made aware of the succession plan once it is in place. Knowing their roles, expectations, and opportunities in the family business will ease the tension between family members and key employees and will allow the owner to resolve any conflict upfront, rather than it becoming an issue when the next generation is in control.

If you believe a business succession plan makes sense for you, contact experienced estate planning/business attorney Steve Welle at O’Keeffe O’Brien Lyson Foss in Fargo. Email him directly or call 701-235-8000 or toll-free 877-235-8002.

 

 

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