5 Critical Questions Owners of Family Businesses Should Ask Ahead of Succession Planning
Succession planning for a family business is crucial to help ensure the continuity of your legacy. The process can be deeply personal and emotional, raising sensitive family conversations about who takes over, how roles will change, and the future direction of the company. As a result, early discussions with your succession planning team of professionals are essential for facilitating a smooth transition in which family members, employees, and stakeholders are informed and aligned while avoiding potential conflicts. Beyond the legal and financial considerations, transitioning a family business requires guidance through personal and practical concerns upfront for a more seamless leadership transition.
A successful business succession requires addressing the right questions with your professional team early in the process and as circumstances evolve. We recommend revisiting these discussions often to help ensure you’re on track and prepared for a successful transition.
1. Who Will Lead the Business Next?
Identifying potential successors involves evaluating the capabilities, readiness, and interests of family members. Lack of direction can lead to confusion about leadership roles, potential disputes among family members, or uncertainty if successors feel unprepared for their future responsibilities. A clear succession plan and strategy not only helps your business avoid gaps in leadership and potential conflicts, but also helps provide stability and a clear path forward for the next generation of owners. Consider these questions when evaluating who will lead the business next:
What qualities, skills, and experience are required? Do they need additional training or development?
How will I communicate leadership changes internally and among stakeholders?
What are potential conflicts or challenges that can come up during a leadership transition?
How will we maintain stability and continuity during the transition?
2. Am I Financially Ready to Exit My Business?
While business owners may feel ready to exit their company, overlooking critical financial risks could impact their retirement timeline and personal wealth. Work with your financial advisor to create a comprehensive wealth plan to address these areas so that you can exit your company with confidence.
How much income will I need to maintain my desired lifestyle in retirement?
How will risks like inflation or unexpected expenses affect my next chapter?
Are there family members such as an elderly parent or special needs child that you will need to provide support for?
What insurance policies should I have in place?
Are my personal assets diversified and properly hedged to protect my wealth?
Are my investments matched to my financial goals?
3. What Is My Business Worth?
An accurate valuation of your business is essential for exit planning, as it helps guide estate and retirement planning decisions. Consider these questions with a business valuation expert:
What valuation method is most relevant for my industry? Common methods include discounted cash flow (DCF), market multiples and comparable transactions.
What are the market comparables in my industry?
Are there ways to potentially improve the valuation of the business?
What are key valuation drivers that my successors should be aware of to help ensure long-term success?
Are there any business disputes or personal liabilities that will need to be addressed prior to the sale?
4. What Are the Tax Implications of Passing Down My Business?
Proactive tax planning is important in avoiding unexpected tax burdens and risks when transferring your business and planning for retirement. Consider discussing these tax implications and strategies with your tax professional:
What are the capital gains tax implications of selling my business?
Should I consider an installment sale or partial sale to minimize the tax impact?
How will the transfer affect my estate planning? For example, will a transfer to my heirs impact my lifetime gift exemption?
Which strategies, such as gifting, deductions, and credits, can I leverage to help reduce my tax liability in the year of the sale?
What advanced trust strategies are available for my situation? For example, is a Grantor Retained Annuity Trust (GRAT) an appropriate strategy for my situation to help me reach my estate planning goals?
5. How Should I Communicate My Plans with My Family?
A succession plan provides detailed instructions and timelines for transferring ownership, and also includes additional considerations such as charitable giving goals, as well as providing your heirs or the next generation of owners clarity about the future vision of the business.
We recommend scheduling ongoing family meetings facilitated by a neutral party, like an advisor, attorney, or mediator to effectively communicate your wishes and preferences before your transition and address changes as they arise. Bringing in key players such as a financial advisor, attorney, banker, and CPA to the conversation early is critical. Don’t wait until the last minute to bring family members into conversations with your advisor. Build those relationships now and have facilitated conversations to ensure everyone is on board.
Furthermore, you may also want to consider bringing in members of the family that are outside the business. For instance, if you have two children, but only one is taking over the business, think about meeting with them both, along with your financial advisor, to make sure everyone has a clear vision and plan for the future.
Secure Your Family Business’s Legacy
Having the right team on your side matters as you move forward. You’ve put your heart, soul, and countless resources into growing your business. Discussing the transition early helps protect your business, manage risk, and minimize family conflicts. A recent Forbes article showed that up to 90% of a business owners’1 personal net worth — and often their identity — can be tied to their business. If that’s you, partnering with a professional team can make the process smoother, more strategic, and aligned with your long-term goals while providing the emotional space to adjust to stepping back from your role.
Certified Exit Planning Advisor David DeWolf and the Quantum team are uniquely equipped to guide you through these discussions, ensuring the continuity of your business and your peace of mind. Whether or not you’ve started these conversations, hear from David about why now is the best time to think about exit planning for your family business. Contact us today to learn more about how we can help you begin your exit plan with your financial and emotional needs in mind.
Sources:
1) Forbes. “Business Exit Planning: Watch for These Blind Spots.” Aug. 24, 2023. https://www.forbes.com/councils/forbesfinancecouncil/2023/08/24/business-exit-planning-watch-for-these-blind-spots/
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