Preparation is crucial for family-owned businesses
Family-owned businesses must understand the importance of having a proper continuity plan, even if their business is being passed down from one family member to another.
Families often think they can keep succession plans “informal” if they’re “just” passing their business to a child, sibling or other family member, but that’s not true. If a family member in a key business role becomes ill, incapacitated, passes awa or decides to leave the family business — for either a planned retirement or another reason — the company must remain stable during (and after) the transition.
A strategic plan can provide stability and direction during times of transition, stress and uncertainty. Family businesses need clear, formal continuity plans that outlines exactly what will happen if key people leave.
Who will take over their roles? Who will be in charge? There are many decisions that need to be made in advance.
Consider the following tips: Work with objective professionals. Your team should include an attorney, accountant, valuation expert and a financial professional, who can help you consider the many components of your continuity plan. For instance, if you have three children, and your oldest child is taking over your family business, what do your other two children get? How do you equalize it?
Your financial professional will help you develop a continuity plan checklist with important details, like determining when and how family members can work in the business, how they’ll share the profits, who will serve in various roles, and how to train the next generation of leadership.
It’s also very important to review current succession (buy-sell) documents and the positioning of company-owned life insurance. This is necessary because of the June 2024 Supreme Court ruling that significantly changed the valuation and inclusion of the life insurance relative to estate and income taxes.
Plan ahead. This will help ensure stability for your company, like determining how you’ll retain high-performing, non-family employees, and demonstrate stability and continuity for your customers. Additionally, you’ll need to determine how you’ll instill trust among employees, customers, board members and other key stakeholders during the leadership transition, especially if it’s sudden and unexpected.
Properly onboard and train successors for key roles. This process should start years before key leaders plan to leave, otherwise inexperienced successors could be placed in high-profile positions prematurely, and not be equipped to handle the responsibilities or pressure.
Train the next generation properly, giving them plenty of time to learn the ropes. Over time, give them additional responsibilities to build their skills and confidence.
Consider each family member’s skill set, personality and experience. Then, determine where their talent would be best suited within the company. Don’t just automatically assume, for example, that your eldest child will be the company’s CEO if they’re not a strong leader. Maybe your youngest child is better positioned for that role because of their skills, experience and ability to motivate and lead.
Involve non-family stakeholders in continuity planning. Key stakeholders — like mission-critical, non-family employees — should be included to ensure that their perspectives are considered, and they feel invested in the process and outcome. Also bring objective, non-family professionals — including your financial advisor, attorney, accountant, etc. — to the table for their expertise and perspectives.
Have a backup plan. Transferring the business to the next generation only works if someone from the younger generation wants to take over that role and has the skills and ability to do so. But sometimes, that’s not the case. Therefore, the continuity plan may need to shift to an “outside” buyer, who could be part of your “business family,” like a key employee who wants to buy and run the company, or it could be an outside investor. A critical component of continuity planning — especially if you’re selling to “an outsider” — is ensuring that the business is ready for sale, which can take years to achieve.
Ensure the business is ready for sale. Get your financial records in order and show profitability. Demonstrate that you have numerous loyal customers, can define your market position, and that your business is strategically positioned and differentiated from the competition. Show that you’ve built a strong, positive company culture that can retain top talent. A potential buyer wants to see all these things.
Joseph H. Guyton is principal of The Guyton Group, with over 35 years of experience providing professional knowledge in retirement income planning, pension, profit sharing and business succession. Learn more at guyton-forge.com.
