Family Business Succession Planning


As the owner of your family business, your lifetime has been poured into making the business a success. However, there comes a time in every business owner’s life when they have to start thinking of what will become of their business once they are no longer able to run it. Though it can an emotional topic for an owner, their family, and their employees, creating a succession plan for your business is an important part of ensuring the legacy of your business continues on. Think of it like writing a will, uncomfortable but necessary to ensure that the business is adequately prepared for the future. In many cases, the family’s livelihood and retirement are at stake. According to a JP Morgan statistic, businesses with a structured and clear plan of succession are more likely to succeed in the second, third, fourth and even fifth generations than those that do not. Even if you don’t plan on retiring any time soon, it is never too early to start planning for your business’s future. Rather, it is much better to have a plan once a situation arises rather than trying to create a plan while to situation is ongoing. With that in mind, we at Mazur and Associates have created this two-part guide to help business owners start their planning as soon as possible.

The first thing to do when creating a succession plan to choose a successor(s). When choosing a successor or board of successors, be sure to have someone

  • with a formal education and understanding of business
  • who has been mentored in your specific business so that they understand its values, culture, and environment
  • with good leadership skills who also has the capability to teach those skills to the next generation

If you decide to choose an heir (a family member) as your successor, you should anticipate and prepare for tension and disagreement amongst the involved family members. The family business is likely important to multiple family members involved, all of whom may have different ideas about how to shape the business’s future. This is why it is so important to make sure your objectives and goals for the business are clear when you take steps to involve other members of your family. It may also be helpful to involve a third-party business advisor as both a source of unbiased insight and a crucial buffer for those intense or emotional topics that come with succession planning.

When creating a board of successors, as many family businesses do, please note the composition of the leaders you have chosen. Make sure that they are fit to be able to strategize both for the mid and long term with business values and growth in mind. Review your policies with your chosen board so they have a full understanding of them and how you would like the business to be continued. Changing the leadership and decision-making role from one person to multiple people on a board also calls for a review of policies. Perhaps you do not have a policy on decision making power divided among multiple people or your policy only outlines how things work with a smaller number of leaders. This calls for decisions making policies and procedures to be created, reviewed, made clear, and put in writing. This will help your business and your successors operate smoothly. Include your successor(s) in the drafting of your succession plan conversations, as it is soon to be their business as well. It Is important that the current generation and the next generation leader(s) have a shared set of common goals for the future of the business.

As we said before, it might be wise to involve a third-party business advisor to help make rational business decisions. We also recommend you bring in a CPA who can provide you, your family, and the business advisor with numerical evaluations of your business that can help you plan properly. For example, the Estate Tax rate in the U.S. is 40% and is due 9 months after the deceased has passed. Many families are burdened by such a heavy tax and this has a negative effect on their family businesses, causing them to go bankrupt or need to sell. Having a CPA will be able to help you create a financially sound succession plan so your family and business do not fall victim to economic hardship. We also recommend you have a lawyer present during your succession planning who has experience creating the proper legal structure and documents necessary to ensure that your succession plan is carried out properly. When drafting your plan, be sure to make the vision and values of the business extremely clear and in writing. The definitions, responsibilities, and structure of all roles should be clearly outlining in the wording as well. Having a lawyer present will enable you to create the legal documents necessary to ensure success.

There are quite a few ways to pass down the ownership of your business to an heir, for example:

  • Family Limited Partnership- a succession plan that transfers business interest to another family member by establishing a partnership with general and limited partner interests, and then simply transferring the business ownership to the partner. It is also possible to gift business interest over time to that partner.
  • Granter Retained Annuity Trust of Unitrust- GRATs and GRUTS are types of irrevocable trusts that a business owner can transfer their assets to while still collecting income for a set period of time. At the end of the set period or upon the owner’s death, the assets then go to the beneficiaries.
  • Private Annuities- this is a sale of property or assets in exchange for regular payments for the rest of the seller’s life time. Ownership is fully transferred to the successor who agrees to make these regular payments until the death of the seller or, in some cases, until the death of the surviving spouse. This method allows those involved to avoid gift and estate taxes.
  • Self-Canceling Installment Notes- SCINs allow owners to transfer their ownership in exchange for a promissory note that the buyer will make a series of payments. Upon the seller’s death, the remaining payments will be cancelled.

Once you have chosen your successor(s), ensured that they have the qualities needed to run your business well, decided on a type of plan, created your plan of succession with a business advisor, CPA, and lawyer, it is time for the final step! Periodically review your succession plan and revise it as needed. Things change, unexpected circumstances arise, but that does not mean your plan cannot adapt along with them. Reviewing and revising your succession plan until it comes time to put it into action is the best thing you can do for your business because it ensures its survival in the face of uncertainty.

If you decide not to choose an heir for your successor, you can use most of the options above with someone outside of your family, but there are additional options as well. You may want to consider your co-owner, a key employee, an outside party, or the company itself as your successor. Part two of this series will tell you all about these other options!

As always, we here at Mazur and Associates are here to help you. As both CPA’s and trusted business advisors, we would be more than happy to assist you in creating a financially sound plan of succession. Give us a call at (732) 936-1230 to set up an appointment and we can get started right away!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s