Family Business Succession Planning: Why You Need to Start Now, Not Later

You’ve built a successful family business. Now for the hard part: keeping it that way. Learn how family business succession planning can help secure your legacy—if you start now, not later.

Unfortunately, many family firms are making a big mistake: not planning in advance for an eventual transition of ownership. Ignoring formal succession planning can cost both the current owners and the next generation dearly if you don’t take action.

What’s so important about family business succession planning?

Succession planning is needed to ensure the survival of the business. It is critical both for the current owners—who may need to plan financially for their retirement—and for the new owners, who may be anticipating financial benefits from the business as well.

A succession plan can help maintain the value of the asset by helping ensure a smooth transition to new management. That can dramatically improve the likelihood of continued success. Unfortunately, many business owners don’t worry about it until it is too late and the succession needs to be rushed by a death or illness. This puts all stakeholders in a severely disadvantaged position.

If that’s you, you’re certainly not alone. A recent U.S. Family Business Survey by PWC found that while over half of family business owners expect to pass ownership to the next generation of their family, only 23% of these businesses have a formal business succession plan in place. 1

By not doing a formal plan now, these business owners are putting the future of the business at risk.

Why Succession Planning is More Important in Family Businesses

There’s something very special about a family business. It can be a source of wealth, of course, but also a source of pride and family identity. Unfortunately, there can be a dark side, too: more potential for feelings, jealousy, and conflict to arise.

Succession planning is critical for any business, but it’s that much more important for family businesses because of the potential for emotional complexity.

We all know the things that can happen when transitions don’t occur smoothly:

  • Family members may feel insecure or jealous if they don’t know where they stand.
  • You may end up rushing and selecting a management successor that isn’t suited or qualified to successfully maintain and grow the business.
  • Valued non-family employees may be concerned about the impact on the business and their jobs, and may consider leaving.
  • Customers may become concerned if the transition isn’t a smooth, gradual one, and look for your product or services elsewhere.

What Makes a Strong Succession Plan?

A robust succession plan should lay out a detailed road map for the transition from the current owners of the business to the new ownership.

A good plan should focus on three elements:

Ownership: Defining who the ownership will be transitioned to. It may be specific family members, or perhaps you may attempt to sell to a third party.

Management: Defining who will take over management of the company. Keep in mind that company ownership and management do not need to be the same. In many cases, it might be more agreeable to transfer equal ownership to all of an owner’s children while only one child with interest and skills assumes the management role. Or, an outside hire may make the most sense. 

Tax Planning: Any business transaction should involve up front tax planning to minimize tax liability and avoid unexpected tax consequences. With family businesses, tax planning is critical so you can minimize estate taxes that may result upon death of the owner(s).

Succession Planning Tips

As you can see, it’s in everyone’s best interest to put a plan in place. Here are our best tips for succession planning for your family business to get you started.

  1. Start Early. Since no one has a crystal ball, you should start a plan as soon as possible, ideally a decade or more before an anticipated transition. Starting early allows more time for training and transition, so that all clients/customers and stakeholders can ease into the change. As we know, unforeseen events can force a much more rapid transition. The more time you’ve had to put the plan together, the better the chance for a successful transition, preserving the value of your asset.
  2. Get Your Family Involved Early. Involving your family early on—both those who are interested in participating and those who aren’t—can help reduce future discord. Be straightforward up front that maintaining the value of the business should be a priority, and everyone will benefit from that. Including every family member will help them feel comfortable about their standing relative to the business, even if they are not interested or suited to being involved in the management. This can help you determine who may be the best fit as successor to run the business.
  3. Assess Skills and Aptitude Early. Many times, an owner may very much want their daughter or son to take the helm of the family business, but that person may not have the skills, interest, or aptitude to do so. In that case, it is better to find out early and discuss strategies such as bringing in an outside manager, or promoting from within among other employees. Yes, it can be awkward, but relying on a valued business financial advisor can help you navigate this challenge smoothly and objectively, for the benefit of your entire family.
  4. Build in Adequate Training Time. Once you have identified a successor, your plan should include a path for training. Especially when a family member will take over for you, it is critical that the transition be smooth so customers and employees are comfortable with the change. So take the time to get that person very familiar with customers, staff, vendors, and processes. Take the time to document important procedures so you can help prevent problems that may happen after you’re gone.
  5. Create a System for Accountability. Reporting and accountability can help keep the transition on track. Ideally, set up regular meetings where you and your outside professionals, such as your accountant, can help you objectively monitor progress and provide feedback, to keep the new management on track and moving forward.
  6. Realize Not Everything Can or Should Stay the Same. Sometimes it is very hard for the current owner to let their new manager run the show. But remember, your business needs to evolve, and fresh thinking and an outside perspective can help your organization thrive and grow. The most successful multi-generational family businesses have grown when new generations have brought new ideas and energy to the firm.

Set up a Support and Accountability System

With family businesses, the conversations about transition need to be handled delicately. It’s usually easier and more comfortable to find a business financial advisor who can guide you through the process and serve as an independent facilitator. This can go a long way in defusing any tensions that come up. Additionally, by following a process, you can learn to avoid the mistakes that other family firms have made in the past.

But not all advisors for family businesses are alike. To help you make your business transition a success, it’s best to look for a firm with significant experience helping businesses overcome similar challenges.

Final Words of Advice

Don’t put off business succession planning, or you risk losing the value of the asset you worked so hard to build. Instead, invest the time now so you can ensure the business continues to succeed for generations to come.


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About Liza Brown

Liza Brown is dedicated to serving clients of Potomac Financial Services as President and Investment Advisor. She is passionate about helping individuals, families and business owners achieve their financial goals by combining risk-managed investing with protection planning. She earned her Bachelor of Science in Business from Virginia Tech, where she majored in Finance and graduated Magna Cum Laude.

Liza Brown

Liza Brown is dedicated to serving clients of Potomac Financial Services as President and Investment Advisor. She is passionate about helping individuals, families and business owners achieve their financial goals by combining risk-managed investing with protection planning. She earned her Bachelor of Science in Business from Virginia Tech, where she majored in Finance and graduated Magna Cum Laude.

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