Start Succession Planning Now

There are many family-owned businesses in the United States, and quite a few of them are facing ownership-transfer issues as their Baby Boomer founders retire. Some older Generation X owners may even be pondering early retirement as well. And, of course, the possibility always exists that an unexpected event could force an ownership change.

On the eve of a retirement, or following a death or sudden incapacitation, family-run businesses have four basic options. The first two involve giving up a family tradition: Close up shop or sell the business to outsiders or non-family employees. The second two choices involve keeping the business under family control: Hiring outside managers or pass on the business to younger family members.

That final option of family succession can be difficult, and not every business that attempts it is successful. Indeed, only a small number of family businesses succeed in transferring to the second generation. Even fewer make it to the third generation.

The key to success: Clear communication and cooperation among family members. Set up a family retreat early in the process and engage an independent third-party facilitator, such as your CPA, to keep everyone's eye on the ball.

The facilitator can help assess the business's current situation, develop strategic plans, and discuss, review, implement and monitor those plans. Other professionals, such as insurance agents and bankers, may also be able to help devise a succession plan and put them into practice.

The process involves mapping out four distinct plans:

1. ‍A business plan sets out the founders' original vision, mission and goals and gives other family members a clear picture of what the future should entail.‍
2. A family plan should aim to manage sibling rivalries and company leadership issues. Here, you might address compensation policies, management expectations, performance measures, job descriptions and business codes of conduct. You should also outline who's entitled to join the business and how to compensate family members who aren't involved in the company.‍
3. An estate/retirement plan needs to incorporates a business valuation and outline financing for the buyout, distributions of retirement funds and estate tax calculations. Another critical issue is the inheritance of corporate and non-corporate assets.‍
4. A succession plan sets the date for retirement, establishes a timetable for training new management, outlines any role the founders will continue to play and arranges for the management of cash flow.

It's never too soon to start. Succession planning can enable you to balance both personal and business interests and help ensure your family-run business successfully makes it through the transition.