Succession Planning Part 2: Transferring Your Business to Family Members

As part of effective succession planning, we emphasize setting a target exit date and openly communicating it. Equally important is identifying the financial support you’ll need for your future lifestyle. To recap from our previous posting, there are five primary ways to exit your business:

1. Close down the business and walk away without transferring ownership (typically not recommended)

2. Transfer to one or more family members

3. Transfer to existing company employees

4. Create an ESOP (Employee Stock Ownership Plan)

5. Sell to a third party

A 2011 survey from the Business Enterprise Institute Inc. revealed the following trends among business owners:

• Transfer to family members: 24%

• Transfer to employees: 41%

• ESOP: 1.2%

• Sell to a third party: 29%

• Other: 4.8%

This post focuses on the nuances of transferring your business to family members—a choice that can preserve your legacy and sustain the family’s involvement in the business, but it also comes with unique considerations.

Key Questions to Consider in Family Succession Planning

When planning a family transfer, think carefully about these questions:

• Will one family member take over, or will multiple members share ownership?

• If only one child or relative is involved, how might this affect relationships with other family members?

• How can potential conflicts be mitigated among family members not involved in the business?

Advantages of Transferring to Family Members

Transferring your business to a family member has several potential benefits, especially in succession planning:

1. Flexible Timeline – Family members are often more adaptable to a gradual transfer, allowing you to set a timeline that accommodates your transition needs. This flexibility also provides you with the time to develop new interests and activities outside the business.

2. Preserving Your Cultural Legacy – Passing on the business to family can ensure your values and company culture continue. Family members who have worked in the business are often well-versed in its operations and values, which can ease the transition and minimize cultural shifts.

3. Building Generational Wealth – Taking over a family business can be a lucrative and fulfilling career path for a motivated successor, potentially offering financial stability that exceeds other professional opportunities.

4. Tax Benefits – There may be tax advantages associated with transferring to family. Consult a tax professional early in the process to explore options that maximize financial benefits for both you and your successors.

5. Control Over Successor Readiness – By working directly with your family successor, you can ensure they are adequately prepared to lead the business with confidence and competence.

Challenges in a Family Succession Plan

While transferring to family members offers benefits, it also presents challenges:

1. Family Dynamics – If multiple siblings are involved, it’s essential to consider how well they will collaborate in and outside the business. We’ve seen cases where sibling partnerships thrived and others where they led to buyouts or family tension.

2. Impact on Relationships – If only one child assumes ownership, think about how this might affect relationships with other children. Will they expect an equivalent “gift” or inheritance? Addressing these concerns proactively can help mitigate potential resentment.

3. Leadership Readiness – Ensuring that your family members are skilled leaders and ethical decision-makers is crucial for your peace of mind. An unprepared successor could impact the business’s financial stability, especially if your compensation relies on the business’s ongoing success.

Steps to Take for a Smooth Family Succession

To set the stage for a successful transition, consider these action steps:

1. Develop Written Succession Plans – Draft a clear development plan for each key manager or leader in the business. This roadmap will guide their professional growth and help ensure they’re prepared for their future roles.

2. Identify Areas for Delegation – Define the business areas you should no longer be involved in and set a timeline for transferring these responsibilities to your leadership team. Clear communication will help your team adjust to new roles smoothly.

3. Prepare for Difficult Conversations – A well-planned family succession involves candid discussions. Make a list of necessary conversations, and work through them in a logical sequence. Seeking support from your spouse or business coach can be helpful in navigating these discussions.

4. Separate Ownership from Employment – Remind your family successor that ownership does not guarantee a position within the business. Their role requires performance and dedication equal to or greater than anyone else in a comparable position.

Successfully transferring a business to family members involves planning, transparency, and clear communication. In our next blog, we’ll discuss how to navigate a business transfer to existing employees. Stay tuned as we continue to explore each path in the journey of business succession.