Family business owners are often reluctant to think about how to pass on the reins. This is understandable: it’s not always pleasant to think about passing on something you’ve worked so hard to build, especially when there are complicated family dynamics. And anyway, what business owner has the time? But proper planning can be critical to giving your business—and your family—the best chance to thrive without you.
There are many aspects to a successful business succession plan. Some major considerations include:
- Your own short- and long-term goals, whether financial or personal;
- Your cash flow needs;
- How you want to time the transition;
- The skills and interests of your family members—whether they’re involved in the business or not;
- the future management of the business; and
- the income, gift and estate tax consequences of the transfer.
Depending on your answers to the above, there are many different ways to actually structure the planned succession. You might consider:
- Gifting your interests to certain family members (and perhaps making offsetting gifts to those who don’t want to be involved in the business). Gifting interests will remove future appreciation and you may be able to use discounts for minority interests and lack of marketability.
- Interested family members could purchase interests from you.
- Corporate recapitalization, resulting in some family members holding preferred stock—and with it, voting control—and the rest holding purely economic interests through common stock.
- Buy/sell agreements can be used to put structures in place for future transitions and unexpected events, like the death, retirement or termination of a family member.
- Incorporating your goals into your estate plan documents.