Succession Plans that Work for Every Generation

07.05.2019 - Gerard F. Joyce

Transitioning your family business to the next generation is not a one-time event. When done properly, it is a process that begins long before you hand over the keys to the kingdom.

Throughout my career in wealth management, I have been privileged to help family business owners create the framework to start having honest conversations with their children and build long-term, formal succession plans that ensured a smooth transition over the course of several years. With a bit of guidance, they recognized the value of opening the lines of communication, sharing financial statements, managing expectations and mentoring successors so they were fully prepared to take on such a large responsibility.

Eliminating the Family Business Blind Spot

There have also been heartbreaking stories about the opposite happening: Successful and well-intentioned entrepreneurs decide that a formal succession plan isn’t necessary because ownership will simply be divided equally among all children when they pass away. The results are predictable: siblings squabble over the direction of the firm, the business pays excessive taxes, and in worst-case scenarios the successors end up selling the family business below its optimized value.

What is causing this breakdown? Succession planning appears to be a blind spot for quite a number of family business owners. Despite the fact that they might have worked for 20 or 30 years to build a multimillion-dollar company from the ground up, successful business professionals often assume that younger family members will simply step in to fill their shoes when the time comes. Procrastination, indecision and secrecy are the worst enemies of prudent succession planning. With a modest amount of planning, these problems can be effectively avoided.

Bringing in a Neutral Third-Party Moderator
When family dynamics collide with smart business planning, the territory can be difficult to maneuver.

In many cases, the sticking point may be business owners who think the next generation isn’t ready to step up, but don’t know how to develop a blueprint to make that happen. Others have such a strong emotional attachment to the business that they subconsciously avoid conversations about how and when, if ever, they will cede control.

This is where a multidisciplinary approach that involves all stakeholders in the family business and a team of experienced wealth planning professionals can be critical. This ensures everyone is on the same page and, before any disagreements or conflicts arise, ground rules can be established for how they will be handled. Nothing is left to chance.

Good Corporate Governance Sets the Stage

In our experience, about half of family business owners express an interest in remaining active in the firm and retaining some influence over the direction of the company. At the same time, increasing numbers of owners are bringing the next generation into their businesses, either at an executive level or as rank-and-file employees. 

Business founders are living longer, sometimes working until they are no longer physically able, while ambitious and typically tech-savvy successors grow impatient. But there are techniques that can bridge this divide.

First, all parties with a vested interest in the company should become active participants in shaping a business governance structure, which includes a roadmap with milestones that specify when and how each role or responsibility should be transferred. Two critical topics are covered in a good governance plan: how the decision to sell the business will be made, and just as importantly, how disputes or disagreements will be resolved.

Boosting Professionalism in Your Business

Many families also benefit from annual performance reviews and documented compensation packages for family members. And, as the next generation becomes more active, it becomes more important to have regularly scheduled board meetings and shareholder meetings. Part of this process entails keeping detailed notes that successors can reference in the future, and written business agreements for relationships you might have with business partners, suppliers or customers.

Some larger businesses develop a family constitution that explains how the business operates and also articulates its core values—from best practices on maintaining relationships with employees to educating and developing future generations and promoting philanthropy.

Legal structures can help ensure continuity

Of course, there are also legal structures that can establish formal requirements for your successors.

For example, a shareholder agreement can set parameters on the transfer of ownership within the family and limit or prevent the sale of business interests to non-family members. Other legal structures provide significant tax benefits. In addition, certain types of trust agreements can ensure that business assets are distributed fairly—but not necessarily equally—granting ownership rights to heirs who are interested in running the family business and bequeathing other assets from your estate to heirs with other plans for the future.

Finally, the financial terms of the transition can also go a long way toward ensuring a smooth and successful transition. Depending on your circumstances, you might consider options such as gifting all or some of the business to your successors (taking advantage of the lifetime gift exemption) and drawing income from the new owners, lending new owners funds to acquire the company, making an outright sale, setting up a trust, or using some combination of these options. Keep in mind that if you sell the business at a discount, the IRS will treat any amount under fair market value as a gift.

The Best Time to Start Planning is Today

At Fiduciary Trust, our portfolio managers often say that the best time to start investing was 10 years ago, and the second-best time is today. The same holds true for succession planning, especially if you have business holdings outside the continental US. 

This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process.Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.


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