Ever since you started your business, you’ve dreamed of passing it on to the next generation. Yet, like many small business owners, you may have put aside creating a formal plan to transfer business ownership to a family member.
While the 2019 PricewaterhouseCoopers (PwC) U.S. Family Business Survey found that 58% of owners have some type of succession plan, most are informal. As PwC notes, determining who will take over the family business can be so fraught with emotion that some families would just as soon avoid the conversation.
But if you want to preserve your company’s legacy and give it the best chance to prosper in the future, family business succession planning is critical.
Here’s how you and your family can work through this process together and map out a smooth and harmonious transition.
Starting Your Succession Plan
Your succession plan should be grounded in an honest assessment of your company’s future, and the interest and capabilities of your potential successors. For one thing, you’ll want to make sure that the person you have in mind also pictures themselves in the owner’s chair someday.
The final decision doesn’t need to be hashed out in one intense family meeting in the boardroom or living room. Instead, look for opportunities to talk about these matters frequently and informally over a long period. You certainly don’t want to wait until your retirement from the business is imminent to spring an announcement about your succession choice.
You may already have addressed your transition plan in some fashion as part of your overall business plan. If so, it’s important to periodically revisit that plan and revise it as needed.
Preparing Your Successor
If you’ve identified a family member who seems suited for and interested in the successor role, start preparing them for the eventual takeover. You may want to encourage them to get more educational credentials and managerial experience, even if it means working for a while outside the family shop.
It’s more likely that your company’s employees will trust their new leadership if you give your successor the opportunity to earn the position through their qualifications, and not just their family connection or birth rank.
Documenting the Transfer
A key part of your succession plan will be choosing the legal documents for transferring ownership, such as a shareholder agreement or buy-sell agreement. You can give shares of the business in installments worth up to $15,000 a year per family member without incurring a federal gift tax, according to Zacks.
Consulting with an attorney and an accountant who work with family businesses can help you sort out the options, with an eye toward minimizing the tax liability for both you and the ones who will acquire this new asset.
Facing and Acing the Process
The last thing you want is for the business you built with your passion and sweat — and the loving support of your family members — to be a source of division within the family. It’s understandable to be apprehensive about the family business succession planning process. But the earlier you start that planning, the more time you’ll have to figure out the best path forward.
Share your future vision with your loved ones now and seek their input in your succession plans, so when it’s time to transfer business ownership to a family member, you’ll both be ready.