What is family business succession planning?

Succession planning involves decisions and planning regarding the transfer of the entrepreneur role. During this process, the entrepreneur determines if, when, how, and to whom they want to transfer the enterprise and for how much. In order to engage in succession planning, the entrepreneur must want to transfer either wealth or opportunity to the next generation and the current business must have some value.

Two of the main succession options are a sale to an outside third party or transfer to the next generation. This differs from estate planning which involves the transfer of wealth and assets upon death or anticipation of death.

What are the steps in the family business succession process?

1) Salable Business 

– Is the business saleable for more than the value of its parts?

  • Some family businesses are just a wage-earning exercise wrapped up in a small business package
  • Business has legs separate from the Entrepreneur
  • Business is financeable by outside investors

2) Entity & Capitalization Structure

  • Need to understand options and playing field with respect to an entity selected
  • Some entities are better suited than others for sale versus generational transfer
  • Tax planning is the key
  • Strike early and often on this point – formation, tax planning for the business, exit planning
  • Continual process of preparing for exit

3) Availability of Recipient Generation

  • Is there a person or person’s who can and/or would be interested in taking over the business?
  • The entrepreneur needs to train them to run the business
  • If there are multiple possible recipients, evaluate their talent, experience, and education
  • Remove the concept of linear passage when talking about business succession
  • Also, realize that succession may be a sale – back to the machine shop

4) Opportunity/Wealth/Burden

– What does the Entrepreneur really want to do?

  • Pass on the opportunity to be an Entrepreneur
  • Pass on the opportunity to earn income
  • Pass on wealth and security
  • Burden the next generation with his or her legacy
  • Some combination of the above

– Member(s) of the next generation have the opportunity to own and run the business vs. member(s) of the next generation have the burden of going to work for the family business instead of pursuing their dream – Is the opportunity or burden worth more than receiving income?

– If there is no member of the next generation prepared, willing, or able to run the business, or the Entrepreneur realizes that the next generation may be better off with wealth than the business – sell it to a 3rd party; transfer wealth.

– Opportunity/wealth combination – the Entrepreneur transfers ownership and control to one member of the next generation while transferring either wealth or income generating stock to another member

5) Post Exit Needs

  • The Entrepreneur must determine their income needs post-exit
  • Plan to sell entity for value to fund golden years (To whom? 3rd party or next generation?)
  • Plan to continue to hold equity to receive distributions to fund lifestyle needs