5 Important Steps to a Successful Family Business Succession Plan

The most recent PwC U.S. Family Business Survey (2019) found that 58 percent of respondents had succession plans, but the vast majority of them were informal. If you don’t engage in proper succession planning for your family business, you risk your family and others involved in your business engaging in heated arguments that can lead to expensive legal proceedings. Additionally, family business conflicts sometimes play out in the local media, which can hurt sales when loyal customers take sides.

Below we provide five important steps to a successful family business succession plan so you can rest assured a smooth transition occurs if you become incapacitated or pass away, or you are ready to sail off in the sunset towards retirement.

1. Collect Information

Preparation is the key to a successful family business succession plan. Before you begin planning, you need to collect relevant information to share with your estate planning attorney. This might also include enlisting the help of accountants and financial advisors. Not only does this provide your lawyer with the things they need to help you plan, but it also provides an opportunity to get your personal and business records organized and implement a system to keep them organized and up to date. Examples of documents you will need for business succession planning include:

  • Current business governing documents
  • Related party contracts
  • Vendor contracts
  • Any estate planning documents that can impact governance, ownership, or succession of your business

2. Get a Current Valuation of Your Business

For a successful family business succession plan, you need a reliable valuation of your business. This includes an assessment of each family business entity and all business assets. If you do not yet have a current valuation, your estate planning lawyer can help you obtain one. In fact, getting an attorney involved in the valuation of your business can help avoid major mistakes during the planning process. If your attorney helps you with a succession plan and starts with a faulty valuation, it follows that everything that relies on that valuation will be inaccurate.

Your family business succession plan can also benefit in other ways by obtaining a current business valuation. As you go through the valuation process, information about the strengths and weaknesses of your business will emerge. This gives you the opportunity to improve your operation and increase profits. The valuation professional can also help your lawyer draft the best language for your buy-sell agreements. Finally, establishing a relationship with a valuation professional allows you to more easily get updated valuations on a regular basis, allowing you to update your buy-sell agreements and other aspects of your plan as needed.

3. Choose Who You Want to Take Over

Arguably, one of the most important aspects of a successful family business succession plan is choosing which child will run the business, or whether multiple children will share the responsibility. You and your children might have assumptions about who will take over, but it’s important to spell these things out ahead of time to avoid difficulties in the future. It’s highly likely the child or children you intend to take over the family business already play a large role in your organization.

To ensure success, you need to spend time early in the planning process working with your attorney to address any potential business interruptions that might occur as a result of the sudden death or incapacitation of any family members who currently play a key role in your business, and will continue to play a key role once you’re gone. For example, you should ensure the right parties have updated powers of attorney for voting by designating a “transfer-on-death” beneficiary to avoid probate delays. You should also have measures in place to replace the chief executive if he or she exits the business unexpectedly. By the time your succession plan is complete, these business structures will be more permanent.

4. Create Rules for Governance and Ownership

Before making any transfers of ownership, your estate planning lawyer needs to help you develop the rules that will regulate governance, ownership, and owner exits after succession has been implemented. This includes rules in four main areas: unit voting, governing board, executive authority, and beneficial ownership.

  • Unit voting refers to the power to exercise voting rights as an owner by appointing and removing board members and approving or rejecting major transactions.
  • Governing board rules includes deciding who sits on a board and how those members will be elected to deal with top executives, oversee budgets, issue dividends, and other board duties.
  • Executive authority refers to rules for owners and board members with regard to making decisions about appointments, titles, duties, and compensation.
  • Beneficial ownership includes family members who get profits from the business but do not hold an employee role. You must make decisions about whether family members should own shares or whether shares should be held in a trust, as well as other issues related to the acquisition and ownership.

5. Update Your Estate Plan

Prior to transferring control and implementing your family business succession plan, you need to update your estate plan with all the decisions made above. This typically includes adding wills and revocable trusts in accordance with any governance decisions made such as allocation of voting rights, allocation of business equity, and allocation of other personal assets. You should also include instructions for the use of life insurance proceeds and how estate taxes should get paid. Additionally, if you plan to leave any assets to charity, you need to include that information in your estate plan.

Contact an Experienced Estate Planning Attorney to Create Your Family Business Succession Plan

The experienced estate planning attorneys at Stephenson, Chávarri & Dawson have helped numerous family businesses plan for succession. We help clients collect the needed information to draft legally-binding documents to ensure succession goes smoothly when senior owners retire, pass away, or become incapacitated. Contact us today online or at 504-523-6496 to discuss your family business succession plan with a member of our skilled legal team.

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