You’ve been thinking about preparing a succession plan for your small business, and keeping it in the family is important to you.  That’s certainly understandable – after all, you’ve worked hard to build your business and it’s probably the most valuable asset you own.  Why wouldn’t you want to pass it on to one or more members of your family?  Seems pretty straightforward, doesn’t it?  But maybe not – because in addition to the legal, financial and other business-related succession decisions facing you, there’s also the emotional side of the transfer to consider.

Family business experts have determined that 70 per cent of family-owned businesses – regardless of their size – fail in the second generation*.  Many times the cause is unresolved, emotionally-charged succession issues.  And even if the business survives, a bad mix of business and emotion can trigger family rifts that never heal.

You don’t want that to happen, of course, and there are ways to ensure your succession plan includes what’s right for you and for your family. Here are a few steps aimed at avoiding ill feelings or disputes and that can help put your succession plan on the right path to intergenerational success:

Have a family discussion. Don’t wait – gather the entire family for a discussion on what should happen to the business.  Outline your hopes for the future – including the role(s) you would like your children to play – and your needs, perhaps for a retirement income from the business.  Listen to their desires and concerns and seek their understanding on the broad shape of your succession plan.

Prepare a list of questions. Give some shape to your hopes for the future of your business and to your family discussion by preparing a list of questions like these …

·         Is there a family member both willing to take over your business and capable of running it?

·         Should your spouse run the business?

·         Should the oldest child automatically run the business or a younger, more qualified child?

·         Is one or more family members likely to agree with your intentions out of a sense of obligation only?

·         Can you afford to simply transfer the business to your children?

·         Will your retirement plans call for the new “family” owner to purchase an interest in the business?  If so, will he or she pay fair market value for it and how will the transfer be financed? 

Set out your wishes and the “family” issues they may raise. Perhaps your wish is that the shares should be left to one child.  If so, are there enough other assets in your estate to leave to your other children? If you are considering leaving your business to siblings, you’ll want to avoid strained relationships from situations in which one sibling feels they are contributing more than others.

You’ll also want to determine an equitable course of action that kicks in should one or more of your successor-children get married.  It’s equally important that your successors implement a fair buy-sell agreement that replaces yours.

Assess succession strategies. Among the succession strategies open to you are an estate freeze and/or a family trust.  Separately or together they can be effective in transferring your business to your children, while lessening the effect of taxes and probate fees on your estate and allowing you to maintain control of your business until you are ready to turn it over to the next generation. 

A succession plan should be a clear blueprint that establishes who will run your business, as well as who pays how much for it and who gets it.  A financial advisor can provide an unemotional, unbiased “outside” view as well as help to ensure you succession plan goes exactly to plan.

* United States Small Business Administration