Succession planning can be one of the most difficult issues faced by a family-owned business. Unfortunately, many don’t survive the transition to the next generation. Good planning is the key. Yet, according to the Conway Center for Family Business, 57% of family businesses have no formal succession plan.
Succession planning needs to consider four core issues:
Often the first preference is for a family member to take over. But family members may lack the skills, temperament, or interest to run the business. Sometimes several family members are interested, and squabbles or rivalries can interfere. That’s why an outsider is often chosen as an independent manager.
No matter who takes over at the top, you will eventually need to transfer ownership to the next generation. This involves questions of estate planning, taxation, and form of business. Sound legal and accounting advice are needed here.
Often a transfer of ownership involves issues of liquidity and funding, especially if it happens upon the death or disability of the founder. You will need to consider life and disability insurance, as well as tax and estate planning issues.
It is often very difficult for the founder to hand over their “baby” to someone else. If a family member is the successor, the potential for interpersonal conflict increases. It is essential to confront and discuss this beforehand. Having a professional advisor mediate these discussions can be useful.
Delaying succession planning until retirement is a mistake. That is because your initial succession attempt may not work out. Also, a sudden accident or illness may force you to change leadership earlier than expected. It is never too early to start planning.
This article is from Alloy Silverstein’s Summer 2022 Client Alert newsletter. Download the full issue or subscriber to future enewsletters at our Publications page.
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