Family business succession planning: Transition to the next generation

Your goals, their roles and the company’s future

Apr 01, 2021

Transitioning your business to next-generation family members can be a complex task wrought with rigorous planning and, frequently, tension and uncertainty among interested parties. Some owners fear the strain and disruption a transition may cause among family members and opt to delay key succession efforts. If you’re one of those apprehensive owners, you’re not alone. According to a recent RSM Middle Market Leadership Council Survey of business executives, most business owners lack strong business succession plans. A quarter of the respondents indicated they had no succession plans in place for the departure of key leaders, and 45 percent described their succession plans as largely informal.

Yet all businesses will eventually transition to new leaders. For families wanting to maintain ownership of their family businesses, it’s even more important that next-generation leadership and succession planning begin sooner, rather than later. Waiting could be detrimental to the business's financial health and future growth.

Who will lead?

Where do you start the process to prepare your family for business succession? It starts by asking, “Who will lead the company when you leave; and is this person the best choice for the business?” It may not be as clear-cut as you think. Consider the following potential scenarios: 

  • Do you have a daughter who has been groomed to be your successor since she was a young girl?
  • Will your sons take on a co-leadership role after your departure?
  • Do you have children who are interested in running the business, but have little to no experience in a leadership role?
  • Do you have family members who support the business and want to have some involvement, but are in separate careers and have no interest in day-to-day operations?

Weighing your unique situation and options and then choosing the best leader(s) for the business is key. While some family members may be passionate about the business and have expressed a willingness to lead, if their abilities don’t match what’s needed to run the company, it’s not a good fit for the future of the business. The company’s long-term vision, along with family and economic interests, must be the guiding factors in family business transition, not eagerness or birthright. It can be a tough choice, but it’s one of the most important decisions you’ll ever make for your business.

Following that, you must realistically assess your successor’s readiness for that role and be prepared to help the new leader transition over a period of time into critical leadership responsibilities. Frequently, the most successful transitions are done in a phased approach. You, as the outgoing owner, may remain in a consultative role with the new leader over the course of a couple of years, until that person is grounded, experienced, and prepared.

Outside management could be your solution

In some cases, you may find that ownership of the business will remain in the family, but leadership will need to be passed on to an outside manager. Perhaps there is a lack of interest to lead among your next generation, or there is not a suitable leader candidate among family. Remember, you must be strategic about this decision for the good of the business. To help maintain objectivity through this often emotional selection, consider turning to your business advisors to help guide you through this process. They can help you organize a leading search and set up parameters around screening and interviewing, possibly forming a committee that includes key family members to vet the outside management.

When your outside management is in place, you may want to keep your family engaged with the business through a family council, special board, or some other governance format, so members have a vehicle for communicating and collaborating with leadership. Even though family members may not have daily interaction with the business, having some formal structure in place for the family to gather and exchange concerns and ideas with management can provide a helpful forum for your next generation and link the business with core foundational attributes and beliefs your family can accentuate.

Strategies to bridge business and family

Other family business succession strategies to consider include:

  • Providing a life insurance policy to those children or family members uninvolved with the business. This offers an equitable way to take care of family members who won’t be part of the company’s operations.
  • Using partial business proceeds to launch a family foundation for philanthropic activities. Rather than the business, family members can be involved in operating the foundation.
  • Leveraging a grantor retained annuity trust, buy-sell agreement, family limited partnership, or other planning tools to help structure the transition and leadership phasing for family members.

Variables unique to your business can influence your succession strategy. For instance, S corporations can only be owned by individuals and certain qualifying trusts; they cannot be owned by partnerships or corporations. However, S corporations are permitted to invest in and to own partnerships or corporations. Ownership interests held by family members in S corporations, LLCs, and partnerships may be transferred using various transfer planning techniques including, but not limited to, sales to other family members, sales to trusts for family members, or transfers to grantor annuity trusts. 

There is no one-size-fits-all in terms of the perfect strategy. Work with your advisors to select the right approach for your specific business needs.

As a business owner, guiding your family through succession can be an emotional process. However, a successful transition can be achieved if you’ve chosen the appropriate leader for the business, maintained open communication lines with your family, and leveraged resources and specialized family-business advisors to help you maintain focus and objectivity.