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A guide to family business succession planning

A guide to family business succession planning

Synopsis
4 Minute Read

Family business succession planning comes with it’s own unique challenges and benefits. Understanding what that transition will look like, and what goals you want to achieve throughout the process, will set the business and family up for a successful future.

  • What makes family business succession unique?
  • Things to consider when building a family business succession plan
  • Family benefits of a strong succession plan
National Leader, Family Office Services

It’s never to early to start your family business succession planning. Through open discussions and goal setting, you can set yourself, your family, and your business up for success.

Family businesses are complicated organizations. They benefit greatly from the interconnectedness of the people running it, but they can also face the challenges that come from working with family.

According to the Harvard Business Review, roughly 70 percent of family-owned businesses fail or are sold before the second generation has a chance to take over. Only around 10 percent remain active companies long enough for the third generation to lead.

A carefully thought-out succession plan can help you stay in the minority of these statistics, enabling your business to grow and solidifying the success of your family for generations to come.

When thinking about succession planning for your family business, there are a few things to consider. Will you be passing the business onto the next generation or selling to a third party? Is your organization and your family ready for the transition?

The right advisor can help you answer these questions and determine the best path forward for your family business.

What makes family business succession unique?

Every family, and family business, is unique. The financial aspect of succession planning is often the most arduous task but in a family business, relationships, and other non-financial decisions, can be the most difficult ones to make.

Remaining neutral on big business decisions can be difficult when family is involved and the line between family member and employee may become blurred. Treating all employees with respect and fairness throughout the process will keep discussions open and reduce hurt feelings.

When succession planning in a family business, you’re not only taking your future into consideration but also the future of your family. Long-term planning when passing a business onto the next generation goes above and beyond normal succession planning and therefore careful planning is key to keeping the company viable and profitable in the decades to come.

Ultimately, you want to set your organization up for success after you leave and start planning early enough to get to usher in and advise the next generation. Having a solid succession plan is the best way to do that.

Things to consider when building a family business succession plan

There are myriad elements to succession planning for your family business. But a few common problems persist throughout the process that leaders should take into account.

  • Varying expectations: Whatever the role they have been or will be playing in the organization after your exit, each family member is going to have different expectations around their future and the future of the business. Developing a set of clearly defined roles and responsibilities for your family members will help ensure no one is taken by surprise, specifically when it comes to share ownership.
  • Long term plans: Have you discussed the long-term vision of the business with your family? It’s important to have open conversations about who will lead the organization or who will get what if the business is being sold.
  • Training the next generation: Have steps been taken or is there a plan to train the next generation to run the operation? Any training should have the long-term vision and goals of the business in mind.
  • Involvement after retirement: Discussions with your family about what role you’d like to have, if any, in the business after you retire will help provide clarity and determine responsibility moving forward.
  • Decision-making structure: As part of succession planning, developing a clear decision-making structure and/or governance model will prevent in-fighting and slow progress. When the next generation takes control, there can be a power struggle that could hurt the business. Ensuring there’s an understood governance model ahead of time can limit disagreements and provide a straight-forward solution to challenges.
  • Tax implications: Whether you’re selling the business or passing it on to a family member, it is deemed to be disposed of at its fair market value and you will be taxed on half the gain in the company’s value at your top tax rate. An estate freeze can lock in your portion of the company’s value, shifting future growth to others. This, and other tax saving options may be available to you, depending on circumstance.

Family benefits of a strong succession plan

Decisions made while succession planning should be made as a family. Having these discussions early in the process gives time to build consensus and get everyone on the same page.

To build a solid foundation for the future of the business and maintain personal relationships, it helps to build a balance between financial and non-financial issues.

A few key benefits to early succession planning for your family business include:

  • Protection for you and your family – Think of a succession plan as an emergency plan. If something unexpected happens, you and your family will be better equipped to deal with the outcome and any impact it may have on the business.
  • Everyone gets to have their say – Family members will be able to make informed decisions about their own futures within the company and can be groomed for future roles.
  • Business growth – Succession planning enables you to uncover any areas for improvement or potential growth within the business and plan for the long-term.
  • Brand integrity and reputation – A family business succession plan should maintain and build on the success of the business and its brand. You know your business best and can speak to what brand consistency, with room for new ideas, would look like.

Family business succession planning can be an emotional process but by bringing everyone to the table and openly discussing the future of the business together, you’ll be primed for a smoother transition.

Speak with an MNP advisor today to learn more about how to set up a solid foundation for the future of your business and ensure your family’s success.

Contact us

To learn more, contact MNP National Leader of Family Office Services Kerry Smith, CPA, CA, TEP.

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