How to Start a Succession Plan: 6 Important Considerations for Your Family Business

The term “succession planning” can sound daunting to business owners, even when they know it needs to be made a priority. Starting your plan doesn’t have to be so overwhelming though, if it’s taken one step at a time. 

A succession plan should not be thought of as a document to be finalized, but as a series of questions, answers, thoughts, and ideas that will continue to evolve. It’s important to remember that a succession plan is part of a living, breathing family enterprise, and it will change over time.

That being said, it can’t just exist in the business-owner’s mind’s eye—it has to be shared and communicated clearly with everyone involved. Here’s how to get started. 
 

Thinking about planning ahead presents a special challenge to many families because at an early stage, most don’t know what they’re planning for. They may not know yet if they want the next generation to take over the business, or even if the next generation will be interested. The current generation in control may not have firm ideas about whether they want to keep the business in the family long-term or if they want to sell it. Start with the acknowledgment that there may be a few open questions. But, putting those questions on the table as early as possible helps set a plan in motion. 
 

When a client with a large operating business comes in to our office, we’ll ask them a series of questions involving their vision for the future of the business. Some have a defined future in mind: “I want to grow it to $100 million dollars and sell it,” or “This business is a family legacy, and the most important thing is to get it to the next generation.” More often than not, the answer is “I’m not sure.” No matter the case, what we say to those business owners is, “let’s talk about it.” The point is to continue the conversation and monitor how the goal evolves. It’s also important to formulate planning that is flexible and can pivot along with the evolving vision. 

Related: Six Steps for Developing a Successful Family Meeting
 

Owning a company is much more significant than just generating dividends every year. A company has a place in the industry, it provides livelihoods for both your family and non-family members, and it holds value for people beyond just those it supports or employs. It’s important to make sure the people around you understand the long-term value of the operating business.   
 

Consider the roles that family members are expected to play in the future of the business. What are the options for family members to join the board or take over ownership, versus non-family professionals or current employees? Who will actually be running the business day-to-day? Who are the voting shareholders who will have the ultimate control?  

The answers to those questions go into decisions about future ownership. By having a team of advisors help you evaluate all of that, the entire family can better understand their current and future value in the business. Owners can consider each of those questions separately and make decisions when the time is right. They don’t have to all move in lockstep. 
 

Part of succession planning is making sure that the successor doesn’t end up being Uncle Sam (because the taxes might be so high, that’s where the money ends up going). Tax considerations are among the most important aspects of a plan to integrate as early as possible, because the greatest benefit might result from transferring entities early and letting them grow outside of the estate. 

Consider what happens if a family member no longer wants to be part of the business or family office. There are tax and other economic implications that come with a family member buyout that need to be planned for. 
 

There arguably is no such thing as starting too early when it comes to educating children or grandchildren about what the business does and why it’s important to the family. Each family member needs to understand what their responsibility is when it comes to the wealth generated from the business. As many of the families who are members of FOX already know, family education is critical and resources need to be devoted to the education aspect of any succession plan. We’re seeing many of our clients putting a lot of effort into structuring a comprehensive education plan for their rising generation family members.