Business Succession Planning - Part III: Keeping It in the Family?

For many business owners with families, they will eventually look at their company and think of it as a “family business.” This can make you feel warm and fuzzy, thinking of leaving a thriving business to grateful heirs who will take the company to new heights of success. Who could ask for a better business succession plan than that?

In many cases, that’s what ends up happening. However, sometimes the reality doesn’t live up to the fantasy, including finding out that it was never truly a “family business” at all. Family members might not share the same passion for the business, lack interest in getting involved, or simply have no desire in actually owning it.

Moreover, passing on a business to your relatives can significantly change family dynamics in ways that some families are ill-equipped to handle. If not dealt with the right way, tension, friction, conflict, and resentment can disrupt both the family and the business simultaneously—a lose-lose situation that nobody wants.

Here are six important things to consider which can help you decide whether keeping the business in the family is the right thing for you, your heirs, and your company:

1. Know What It’s All Worth

As a business owner or founder, it’s easy to let your emotional attachment and years of investment in the business skew your view of what it might be worth—especially when your heart is focused on passing on that value to your heirs. As the leader of the business, if you’re not willing to make an objective assessment of the company’s true market value, then nothing else about the process is going to work.

2. Know Who Is in and Who Is Out

One of the biggest mistakes business owners can make is waiting too long to discuss the idea of passing the business on to other members of the family. Without proper planning, you may be left with no option but to pursue a rushed, outright sale if they turn you down. Even if you have family that work for the business, they may view it as just a job rather than a legacy worth continuing. Starting these discussions early will allow you to gauge their interest in future ownership and plan accordingly. Training your successor is a deliberate process that is often years in the making, not simply a last-minute hand-off when you’re ready to retire.

3. Separate Family Culture from Business Culture

All too often, dysfunctional family dynamics spill over into family-owned businesses, leading to emotional decision-making and personal conflicts influencing business and financial decisions. In contrast, successful family businesses thrive on clear communication and a no-nonsense approach to how things are run. They operate with a shared understanding: everyone works for the business, not for each other. Family matters and personal issues have their own time and place, and it’s not while you’re on the job.

4. Sometimes “Equal” Is Actually Very “Unequal”

In many family businesses, it’s common for each family member who works for the business to get paid the same, regardless of their role. This approach often stems from a desire to treat everyone equally. For example, parents may want to pay all their kids the same, as they love them all equally. While this sentiment is understandable, it’s not practical when it comes to running a business. Compensation should be commensurate with each person’s role and responsibilities. A family member that works 60 hours a week should not get paid the same as their sibling that only works 20 hours a week—not only is that unfair, but it’s also dispiriting for those contributing the most to the business. “Equality” is better reserved for your estate plan, where you can easily correct for any necessary and appropriate inequalities on the business side.

5. Decide Whether You Want to Leave Them the Business or the Value of the Business

Don’t bequeath ownership stakes to your heirs just for the sake of it. Inheriting a business—even for family members who aren’t involved in its operations—can come with significant responsibilities. Have you considered whether that’s something they want? If not, and you decide to leave them shares anyway, it could lead to dysfunction and distrust down the road for those actively running the business. Fortunately, there are plenty of alternative options for leaving your heirs with the equivalent value of their share of the business (e.g., annuities, lump-sum payouts, etc.) without burdening them with ownership responsibilities they may not want to take on.

6. Consider Including Only the Family Members Who Are Working in the Business

Estate planning can—and often should—involve the entire family, as all members may eventually be beneficiaries of the estate. However, each individual may have different needs and priorities that should be considered. On the other hand, business succession planning is intended specifically for those with an ownership stake and an active role in managing the business. Spouses, children, grandchildren, and extended family that you would like to inherit value from the business can be accommodated during the estate planning process, but the future of the business itself requires a different approach. Key decisions such as roles and responsibilities, titles, compensation, ownership stakes, strategic growth initiatives, and transition planning should be made collaboratively by those who will be taking over the company, ensuring a clear path forward once you step away.

We often emphasize to our clients that succession planning is a critical element of any small or closely held business’ long-term strategy—and it should begin as early as the company’s founding. This advice is particularly important for “family businesses” as complex interpersonal dynamics and deeply intertwined estate and business planning demand careful consideration.

With time, open communication, hard work, and dedication, there’s no greater reward in a business succession plan than watching the next generation elevate the company to heights you never imagined possible.

If you have questions about the business succession planning process or would like guidance on challenges within your family business, please feel free to reach out. Our team is here to help.