Identifying a Successor for Your Family-Owned Business
small business owners fail to plan for what will happen to their business if
they are not able to continue to work due to death or illness. Some
business owners do not know about succession planning, while others think they
are too young to worry about death or incapacity. It is natural to want
to avoid thinking about these issues, but the age of the business owner is
irrelevant to the need to create a business succession plan, as unforeseen
events such as death or disability can occur at any time to anyone.
owners should begin succession planning early in order to ensure the continuity
of management, goodwill, operations and their client base in the event of the
owner’s departure. In the case of small family–owned businesses, it is
often the primary asset so you owe it to your family to focus on the issue in
challenge for many small family-owned businesses in succession planning lies in
choosing a successor and deciding how the business will be governed when you
are not there. Non-family owned businesses can continue without the
owner, as they typically have diversity of management and ownership.
Family-owned businesses face a different reality, as they tend to have their
entire operation, clients and goodwill linked to one person. The tough decision
for the small family-owned business owner is which relative– sibling, child,
niece, nephew or combination thereof– will lead the business, and how will
future decisions be made about the overall direction of the business.
business owner embarking on this process of succession planning should identify
one or more potential successors who have a demonstrated passion for the
business and are interested in running the business. The last
person you want running the business you worked hard to create is someone who
lacks a passion for the business and its’ product or service. Remember,
your clients will notice bad business choices.
It is important to take an inventory of the potential successors skills that
are relevant to continue the success of the business. Which relative or
child treats you the best should not be a factor in making this decision.
Owners of small family-owned businesses going through the succession process
should make every attempt to include the entire family in the discussion to
avoid or reduce familial discord.
reason to begin the succession process early is to have enough time to
cultivate, train and select the perfect successor for your business.
Depending on the size of your business, you may want to hire a consultant or
consulting firm to assist you with this creation and implementation of a
training program for the potential successor.
valuation of your business. There are many accounting firms that provide
this service. Prior to the changed economy, there were a number of small and
medium- sized family-owned businesses who adopted succession plans whereby they
allowed for outside investment into the business, sometimes selling all or half
of their shares to investors. However, within the last three years, due
to the fluctuations and uncertainty in the capital markets and tighter
restrictions to capital, small and medium- sized family -owned businesses have
had more difficulty obtaining access to outside capital. Consequently,
more small and medium- sized family-owned businesses are staying put and not
It is a
common story for owners of small family-owned businesses to enlist the services
of an attorney when it is too late and serious disruptions in services to clients,
infighting and lawsuits are already underway. Meet with an attorney who
focuses in small business law, estate planning attorney and tax attorney in
advance to discuss the tax implications of agreements such as a Buy-Sell
Agreement, Shareholder Agreement, or a Stock Redemption Agreement which are
commonly used in business succession planning and may be necessary to execute
your succession plan