Succession planning is one of the most important, and often overlooked, aspects of running a successful family business. Without proper planning, things can get messy.
This guide to succession planning for your family business covers the core steps to help you build a clear, practical plan that preserves your legacy and supports your long-term success.
Why Family Businesses Need Succession Planning
Small businesses are the backbone of the economy, creating jobs, fueling innovation, and shaping the character of local communities. Almost half of U.S. employees work in a small business.
Family businesses blend entrepreneurship with legacy. In addition to setting the business up for long term success, key stakeholders must also weigh how each decision impacts the family’s financial future.
Owners who lack an exit strategy or fail to set goals related to business continuity risk unexpected conflict or even business failure.
Purpose of this Post
This article will provide a clear guide on the succession planning process.
Whether you’re creating a transition plan for the first time or updating an existing one, we’re here to help every step of the way.
Similar to how a well-prepared estate plan can offer clear instructions to your loved ones when you pass, formalized succession plans can both ensure continued success of the business and protect family harmony.
Start early, make a plan, and revisit the plan to adjust as necessary. You’ll be glad you did.
What is Family Business Succession Planning?
Defining Succession Planning
Succession planning focuses on the transition of leadership responsibilities and key roles within a business from one generation of leaders to the next. This can include ownership, management, and day-to-day operations.
Other related terms that are worth defining include:
- Exit planning – the process through which business owners prepare specifically for transferring ownership of the business
- Business continuity planning – the process of ensuring the ability of a business to continue operations during or immediately after major disruptions.
Succession planning, continuity planning, and exit planning often overlap, especially in family businesses where owners and employees wear many hats.
Addressing all three areas helps support business growth and sets the business up long term success.
How Succession Planning Differs from Standard Leadership Transitions
Succession planning in family businesses goes beyond changing leadership, requiring thoughtful navigation of emotional ties, shared history, and informal decision-making structures.
Given these dynamics, clearly identifying the roles and responsibilities of key stakeholders early in the succession planning process is essential to avoid conflict and ensure alignment.
Succession planning for your family business should prioritize preserving values and legacy, while also addressing key elements of a traditional business transition plan such as getting a business valuation and transferring ownership.
The Importance of a Comprehensive Succession Plan
Preserving Family Legacy
Your family business is a pillar of your local community, with a reputation built over decades.
A well-thought-out succession plan helps protect your family’s name and reputation while honoring the work you’ve put in over the years, ensuring that the business’ values and impact endure for years to come.
Ensuring Business Continuity and Stability
Formalized succession plans minimize potential disruptions and build confidence among stakeholders by preventing confusion.
Proactive planning can also prevent leadership voids, ensuring that key roles are filled without delay and that the business continues to operate smoothly through periods of transition.
Mitigating Risk and Financial Uncertainty
Though it’s impossible to remove all risk, a little forethought goes a long way. A clear, well-documented exit strategy and succession plan helps a family business avoid or minimize the effects of common challenges such as sudden departures, unexpected tax liabilities, and legal disputes.
As an owner, you want key stakeholders to see your business as stable, low-risk, and proactive, regardless of if you’re talking to a lender, an investor, an employee, or a potential buyer.
Effective succession planning increases your business’s value and strengthens its bankability, providing greater flexibility when it comes to transferring ownership.
Maintaining Family Harmony
Perhaps the most significant benefit of proper planning in family businesses is that it can help reduce intra family tension while promoting harmony and alignment.
Running a business can create stress that strains even the strongest family relationships. Clear communication and well-defined roles and responsibilities lessens the potential for conflict.
Key Components of Family Business Succession Planning
Leadership Identification and Development
An essential part of succession planning that should begin well before retirement is identifying and developing future leaders within the family business.
While your main goal may be to identify who will take over ownership of the company, this should go beyond finding one person to replace the owner. A good succession plan is multi-layered.
Identify Key Roles and Individuals
Apply the “hit by a bus” test: Who in your business are you least prepared to lose? Whose sudden absence would most disrupt operations and threaten business continuity?
Assess Risk Level for Each Person and Position
Assess the risk level for each key person and position in your business. Focus first on the roles whose absence would have the greatest impact on operations or continuity. Prioritize your efforts accordingly.
Document Key Capabilities
What makes these key stakeholders irreplaceable today? Maybe your CFO has financial knowledge no one else in the business has. Or perhaps your sales manager knows more about your customers than you do.
Identify Potential Successors
To reduce dependency on key individuals, explore both internal and external solutions.
Maybe your bookkeeping has gotten complex and could be outsourced to a CPA firm while one of your family member employees has strengths that bode well for running the company in the future.
Develop Solutions for Key Roles
Start to make a transition plan. For potential internal successors, draft a formal development plan that addresses key areas to prepare them for the jump. Invest time (and money) into training and mentorship.
That might mean cross-training, better documentation by current leadership, or other training and development.
Set objective, measurable criteria for leadership readiness. Start early and communicate clearly with those being developed.
There are plenty of useful tools available to support family businesses with succession planning.
Ownership Structure and Transfer of Equity
While developing future leaders and transitioning key roles can strengthen your business for the long run, transferring ownership is a different challenge entirely.
Consider first how your business is structured and how you plan to transition ownership.
For example, a Family Limited Partnership should be treated differently than an S Corporation or a C Corporation.
When it comes to transferring ownership, there are several options to consider:
Sale during lifetime to a new owner or multiple owners, which can be structured in a number of different ways, each of which has its own pros and cons.
Gifting part or all of the business to your heirs, which can have significant estate planning benefits if the plan is to maintain family ownership and control.
Transferring at Death – Ownership can be passed on through a will or, more commonly, a trust, which can offer greater control.
Selling at Death via a buy-sell agreement or similar arrangement, often funded via life insurance.
Family Governance Framework
Because family businesses can blur the lines between personal and professional, it’s important to have a strong family governance framework.
Some families create a family constitution to write down core values, beliefs, and guidelines for how important decisions are made. This helps key stakeholders stay on the same page.
You might employ a family council model, where a designated forum exists for discussions on family matters and conflict resolution separate from day-to-day business operations. This structure helps ensure all voices are heard, expectations are clear, and issues are addressed proactively rather than reactively.
A strong governance framework can also define roles for family member employees working in the business, set boundaries for involvement, and create clarity around ownership and succession decisions.
While every family is different, having agreed-upon guidelines in place goes a long way toward preserving both business health and family harmony across generations.
Communication Strategies
Once your family governance framework is in place, consistent communication is essential for business continuity and effective succession planning.
Family businesses often face complex challenges, especially when it’s time to formalize a transition plan. Tensions can rise, whether it’s an aging founder who’s hesitant to step back or siblings navigating new leadership roles.
By sticking to the rules and expectations you’ve already set, your family will be better prepared to manage conflict, build trust, and keep the business moving forward through times of change.
Contingency and Risk Management
Another important aspect of family business succession planning is managing risk and having backup plans in place.
Think through what could go wrong and prepare for it ahead of time. Common risks include:
- An intended successor is no longer willing or able to take on the leadership role
- Unexpected death or disability creates a leadership vacuum
- Legal disputes from family members who feel left out or treated unfairly
- No clear backup plan, leading to confusion or business instability
In addition to clear documentation and open communication, it’s important to have legal and financial safeguards in place.
These might include buy-sell agreements, key person life or disability insurance, and emergency succession plans to ensure the business can continue without interruption.
Step-by-Step Guide to the Succession Planning Process
Conducting an Initial Assessment
Consider the operational, financial, and leadership landscapes within the family business.
If you haven’t taken a step back to evaluate your business’ health for a while, consider performing a SWOT analysis or using another strategic planning framework.
This can help you build and document a baseline assessment of the business today and prepare you and your successors for the business’ future.
Defining Goals and Objectives
Nobody wants to take over (let alone buy) a stagnant and disorganized business. As the owner, you want the impact of your business to outlast your retirement.
Set goals that are clear, actionable, measurable, and directly related to your succession plan to ensure a smooth transition.
These goals might focus on preserving family legacy, driving business growth, improving stability, or even modernizing technology and operations.
Examples:
- Identify potential successors for all key positions within 12 months
- Once identified, draft a development plan for each person
- Have key stakeholders document systems and processes that are crucial to their roles and responsibilities by quarter end
- Get a business valuation done at the end of the current fiscal year
- Maintain family ownership of business into next generation
If there is a goal that would make your life easier once accomplished, chances are it will also help your successor(s).
Identifying and Developing Successors
Choosing the right successor is one of the most important steps in the succession planning process. Focus on qualifications like leadership skills, business knowledge, and commitment to the company’s mission.
If multiple family members or employees are being considered, use clear criteria to evaluate each candidate.
Once a successor is chosen, create a formal development plan that includes mentorship, hands-on experience, and regular check-ins to ensure they’re ready to lead.
Structuring the Transition Timeline
In an ideal world, you’ll start early and build your transition plan well before you step away from the business. That being said, small businesses don’t always operate in an ideal world and day-to-day demands can make early planning difficult.
The amount of time you have before your planned retirement will play a big role in shaping your exit strategy.
If, for example, you have only 12 to 24 months, you’ll likely need to focus on the most essential parts of the succession plan and set aside less critical steps that a longer timeline might allow for.
No matter your timeline, creating a detailed plan that outlines what should happen and when is essential to bring clarity and hold leadership accountable.
Addressing Legal and Financial Considerations
If you’re like most business owners, the business is not only your main source of income, but your most valuable asset and your biggest area of financial risk.
This makes it important to get things right and have as much information at your disposal as you need to make informed decisions.
Whether you’re weighing the tax impact of a stock sale versus an asset sale with your CPA, or working with your attorney to protect the business from risks like a family divorce, there are many strategies, some simple and some more complex, that can be built into your formalized succession plan.
Implementing and Monitoring the Plan
After you get organized and make a plan, take care to implement the plan and revisit your progress towards the goals you’ve set.
Set up check-ins with key stakeholders and family members where necessary. Businesses don’t operate on a spreadsheet. You may need to adapt the plan for one reason or another. It’s okay to be flexible, but keep building momentum.
Navigating Common Challenges in Family Business Succession
Family Conflicts and Emotional Ties
While every small business has its quirks, family businesses often come with unique dynamics and blurred lines.
Emotions often run higher. Loyalty to a previous generation of leadership can make transitions difficult. Sibling disagreements (or disagreements between any relatives) can affect decision-making in big moments.
Revert to the family governance framework you’ve established and proactive, transparent communication with key stakeholders.
If necessary, consider getting a third party professional mediator when a fresh, unbiased perspective is needed. Having a conflict resolution protocol will set the business up for long term success.
Readiness and Competency of Next Generation
While many owners may hope for their kids to take over their family businesses, forcing the issue can be risky.
Business performance may suffer if an inexperienced and underprepared family member is forced into a key role.
Employee morale may drop and resentment may grow if there’s an air of nepotism that favors undeserving, low-performing family members over objectively better alternatives.
Be honest with yourself and other leaders when you start to identify potential successors. If a family member can’t be adequately developed in line with your transition timeline, consider alternatives.
Generational Gaps and Cultural Shifts
There’s one thing you can be certain of as you transition from one generation of leadership to the next: things will change.
That’s often a good thing. Work to maintain a balance that leverages the best each leader or developing leader has to offer.
Consider fresh perspectives and modern approaches to business while preserving core family values and the best aspects of the company’s culture.
Balancing Family Interests with Business Needs
In many situations, what’s best for the business may also be what’s best for you and the other family members. Occasionally, however, there may be tension between personal goals like funding retirement and business goals.
If you’re the founding owner of your family business, you may want to be compensated well for what you’ve built so you can afford the retirement you deserve. At the same time, you may want your kids or other relatives to feel confident they’re getting a good deal and that the business is in good hands.
Consult with your team of advisors for input on transferring ownership and how to structure your exit. Plan ahead for potential conflict if you plan to maintain an ownership stake while no longer being involved in operations.
The Role of Professional Guidance
Successfully navigating the succession planning process takes more than good intentions. You need the right team of professionals.
From legal guidance to tax strategy and retirement planning, each advisor plays a critical role in helping you protect your legacy and make informed decisions
Legal Advisors and Estate Planners
An attorney can help ensure your interests are protected while managing the legal intricacies of a sale, negotiating on your behalf when necessary.
Business transition planning is inherently intertwined with legacy and estate planning. Exiting a business or considering a sale is a good time to revisit your estate plan and make sure things are in order.
Financial Advisors and Tax Specialists
If you’re hoping to retire after selling your business, a financial planner can help make a retirement plan and can tell you how sensitive that plan is to the sales price of your business.
A CPA or other tax specialist can help ensure your financials are in order and can give guidance on tax ramifications of a sale as well as planning strategies such as structuring your sale as a stock sale vs an asset sale.
Business Consultants or Coaches
A business valuation expert can give an independent assessment of your business’ value, which can be especially helpful when selling.
A business broker can help you find potential buyers for your business and provide insight on similar businesses they’ve sold.
Other business consultants can help you prepare a formalized succession plan or optimize a plan you already have in place.
Importance of a Unified Advisory Team
Coordinating action and communication amongst your team of advisors is essential as many decisions have domino effects on other areas of your financial picture.
It’s important to consider whether your team of professionals has adequate experience working with small business owners. You may have been working with an advisor or CPA for years but find they’re ill-equipped to help you through the transition of your business.
Financial and Estate Planning Considerations
Valuation of the Business
A common misconception in small business succession planning is that a business valuation is only necessary if you plan to sell the business.
While a business valuation is crucial if you’re selling, there are plenty of reasons to have a professional valuation done, selling or not.
Estate Planning: A current business valuation helps ensure your estate plan reflects the true value of your largest asset. This is essential for fair distribution among heirs, minimizing estate tax exposure, and determining how much ownership should be transferred through trusts or gifts
Tax Planning: Knowing the value of your business can help you, with the help of your CPA, build more effective tax strategies and prepare for potential capital gains and estate taxes down the road.
Insurance and Risk Management: An accurate business valuation informs how much insurance coverage you may need to fund a buy-sell agreement, protect against an unexpected loss, or provide liquidity to your estate if you pass unexpectedly.
Equitable Ownership Allocation: When transferring ownership to successors, a current valuation supports fair and transparent decisions.
Common Business Valuation Methods
If you’re working with a business valuation expert, get an understanding of how they arrived at your valuation. Typically, their approach will fall into one of the following categories.
Market Approach compares your business to other similar businesses that have a readily identifiable value either due to being sold recently or being publicly traded.
Income Approach considers the ability of your business to generate cash flows in the future and estimates the present value of those cash flows.
Asset Approach takes the value of your business assets, such as equipment and real estate, and subtracts your outstanding liabilities to arrive at a value.
Tax and Estate Implications
The way you choose to transfer ownership of the company will have an impact not only on your tax bill and estate plan, but also on your successor(s).
Gifting shares of the business can lower your taxable estate and reduce future taxes for you, though it doesn’t bring you income and may create a tax bomb for the recipient if they sell the business in the future.
Selling may bring you income and give you more control over the timing of the transfer, but it can also trigger capital gains taxes and limit your potential successors to those who can afford to purchase the business.
Passing ownership via your estate or trust can offer continued control and tax benefits for your heirs, but requires clear documentation and may create tension if you reduce your involvement in operations without transferring ownership until you pass.
Income and Retirement Needs for Departing Owners
For most small business owners, retiring comfortably depends on an exit strategy that provides some form of income.
In order to prioritize business continuity and set the business up for long-term success, an owner may have to consider a number of strategies.
A partial sale may provide some cash up front while allowing you to maintain control of the business via shares that can be sold at a later date.
A leveraged buy-out can allow the new owner(s) to make a clean transition while using bank financing to write you a check.
Finally, a seller-financed installment sale can provide a stream of income over a period of time (such as ten years) to the seller while offering the buyer(s) more financial flexibility.
Taking Action: Building and Refining Your Succession Plan
Start Early and Iterate Often
It’s never too early to start building a succession plan for your family business.
The only thing more impressive than building a successful family business is building a business that continues to grow and succeed long after you’ve stepped away.
A succession plan should be a living, breathing document that evolves over time. Whether you’re starting from scratch or dusting off a 20-year-old binder, the key is to start early and take an honest look at where things stand.
Engage Stakeholders Proactively
Whether you’re the sole decision maker of the business, you have a single right hand person you trust, or you have a larger team of leaders, gather insights from key persons at various steps of the succession planning process.
Expect your final transition plan to look different from your first draft. Focus on building a process that encourages regular review and updates to make sure you’re staying on track with your set goals for succession and business continuity.
Use Checklists and Timelines
While there’s no one-size-fits-all succession planning tool for small businesses, there are plenty of useful resources available.
Do not make the mistake of making your succession plan or exit strategy a side project that you’ll get to when you have time.
Develop a formal succession plan that includes actionable goals, clear timelines, with measurable milestones to hold yourself and your team accountable. Transparently define roles and responsibilities for you and other key stakeholders involved in the transition.
Start early to give yourself enough time for the full process to unfold. Be sure to account for leadership training, legal guidance, and estate planning, each of which can take time and present unexpected challenges.
We Can Help You With Your Family Business Succession Planning
Ultimately, succession planning for family businesses helps to maximize and protect family wealth, safeguard the family’s legacy, and ensure long-term stability.
As a small business owner, figuring out your own financial needs is a good place to start. Then you’ll use that information to set goals for the transition of the business.
If you have a formalized succession plan for your family business, be sure to review and update the plan as needed to make sure you’re on track.
If you haven’t yet drafted one, consider connecting with a fiduciary advisor to evaluate your needs and start the succession planning process.
Our team of CERTIFIED FINANCIAL PLANNERS® and fee-only fiduciaries based in Spokane, WA can help. We serve clients virtually across in the US or in-person at our office.
We collaborate with trusted CPAs and estate planning attorneys to make sure your finances are taken care of and you can focus on enjoying retirement.
If you’re ready to speak with an experienced team of trusted Spokane Financial Advisors, schedule a complimentary call with our team.
