Assets & Answers: Succession Plans for Family Businesses

How important is it for a family business owner to have a concrete succession plan?

kenneth j. bower, ceo, clayton financial group
We believe it is critical for all family business owners to commit to a written succession plan. We recommend that the family members who own and run the business put an initial plan in place as soon as possible. The plan can be modified over time and likely will need to change over time, depending on business growth and family dynamics. In some cases, the succession plan will detail how the next generation of family members become involved in the business, and other situations may dictate that employees have a chance to purchase equity in the company.

The key ingredient in formulating succession plans is clear communication among all family member owners (including spouses) and the business and legal advisory team. The biggest reason family business owners don’t plan is inertia, and we encourage business owner clients to be prepared so that the business (and the family finances) can survive a wide variety of undesirable scenarios (e.g. a major disability or the death of a principal owner or key employee). As the expression goes, no one plans to fail, but many fail to plan. At CFG, we like to take a proactive approach and hold ‘feet to the fire’ to ensure continuity and successful transitions.

doug mueller, president mueller prost cps + business advisors
Business owners inherently take on risks over time. The ones who are successful have taken on and effectively managed risks, and are building wealth for themselves and their families. The biggest challenges entrepreneurs face are often the ones beyond their immediate control. Death, disability, changes in the economy or industry, as well as the loss of key employees, are constant risk factors.

We often advise our clients to know both how to get into and out of a deal. Having the end in mind helps business owners understand all options along the way of business ownership. Proper planning includes understanding the value of the business, as well as what may increase or decrease that value.

One scenario we often see is family members not wanting to carry on a family business when the first generation is ready to retire. Early planning would allow business owners to evaluate non-family ownership models or sale options before the need for transition arises. Without proper succession planning, a business owner lacks options and may be forced to make a less than ideal decision.

To fully understand options, an owner first must understand the value of their business. This can be done through a business valuation or a calculation of value. From there, owners can determine the drivers of their business, and the options when it comes time to exit the business.

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