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MyOwnBusiness Institute

Family business succession planning


Family succession planning is too often neglected because business owners underestimate its importance to the family and the business. This session will teach you the keys to effective succession planning.

  • Succession is Not Easy
  • Planning Family Succession
    • Partial measures are not enough
    • Why succession planning is routinely neglected
    • Adverse consequences are preventable
  • Your Succession Team
    • Lawyer
    • Certified Public Accountant
    • Financial advisor
    • Insurance advisor
    • Key employees who are not family members
    • Advisory board
  • Choosing Your Successor
    • Thoughtful planning can strengthen the company
    • Coordinating founder and first generation goals
  • Resolving Sibling Goals
  • Top Ten Do's and Don'ts


At some point in the life of your business, you should begin the process of turning your business over to others. No one likes to think about death or taxes...or creating an exit plan. But failure to take on this responsibility will not only be costly to you but also to your family, employees and can lead to unnecessary and ruinous outcomes. You will have four alternatives for an exit strategy:

  1. Plan for family succession which we will deal with in this session.
  2. Sell the business (covered in Selling Your Business).
  3. Liquidate the business and sell the assets.
  4. If your company is in dire financial condition, you may have to combine #3 with the last resort which would be to file for bankruptcy.

If your children or other family members are interested and qualified to run your business someday, now is the time to begin establishing a strategy to implement a successful transition plan. But be warned: according to a Bank of America study, while three out of four companies say they have a succession plan, fewer than 40% of businesses have actually implemented them. And just 15% of family businesses even make it to the second generation and even fewer to a third.

So you have a choice: someone is going to end up dictating how your company's assets are transferred. If it's not you, it will be someone who will be less invested in the outcome than you are. Instead, it's far better to start with a solid foundation which can be built upon by your successors. (From Expanding and Handling Problems of the Starting a Business course.)

Partial measures are not enough
There is no simple answer in implementing succession.

  • It is expensive. Transferring business control and assets requires expensive, highly qualified professionals.
  • It will involve issues of management of the business, its ownership, and taxes.
  • It is a process, not an event: Over time, you will deal with changing laws and tax rules.
  • It is not an undertaking you can accomplish piecemeal: The various aspects of the plan are all interactive with each other.
  • It will take away time from your daily business responsibilities.

Why succession planning is routinely neglected
Successful entrepreneurs devote all their energies to the complexities of operating their businesses. Neglect in undertaking a plan can be the result of a combination of factors working together. These could include little desire on the part of the founder to give up leadership or perhaps lack of interest on the part of the children to take over. Those who neglect succession planning only do so because of lack of knowledge of the importance to them, their families and their business.

Adverse consequences are preventable
A carefully planned, documented and maintained succession plan is like maintaining insurance in place to assure the maximum potential for good fortunes for the company. Not having a plan in place is like "going naked" on insurance coverage, where you are betting the company that an adverse event will not take place.

The potential adverse tax complications in the absence of a plan are horrendous. Decades of work can be dissipated unnecessarily and preventable by having a plan in place.

Having one or more of your family members take over the business will require a collaboration of specialists dealing with taxes, legal issues, family matters, training strategies and family counseling. It is a good idea to begin developing your exit strategy early and have regularly scheduled meetings of the entire team to update and reevaluate the succession plan.

In addition to an ongoing evaluation of your successor, your team should also be considering issues such as:

  • Is there adequate funding available through insurance to ensure business survival in the event of premature death of the owner?
  • How will retirement income be provided to the retiring owner?
  • What alternative strategies should be pursued in the event that there is no qualified family member to take over the business?

Transferring your business to other members of your family will include the transfer of large assets in which taxation will play an important role. But be careful that tax planning does not become the overriding consideration when making decisions. Regardless of how qualified your tax advisors are, taxation issues should not become the deciding factors. It is better to decide what will be most appropriate for you and your family and then let the lawyers and tax specialists determine the most tax efficient way to accomplish your objectives.

The disposition of your business will require strong interpersonal skills on the part of your lawyer. Issues to be addressed will include overall estate planning as well as the succession plan of the business.

The reasons that most family succession plans are never fulfilled include unmanageable taxes incurred, no offspring being interested, and family discord. Your lawyer and CPA will help to manage these issues.

Your CPA and lawyer's joint role will be to prepare your tax defense. The succession plan will provide an opportunity that will permit you to maximize your various exemptions and shift tax burdens off your successors. These taxes are not to be ignored. You will be exposed to at least three kinds of taxes: estate taxes, gift taxes, and corporate gains tax.

Financial advisor
If the plan incorporates financial payouts, your financial advisor can offer suggestions for dealing with a wide range of investment options. Once again, your succession team should work together in helping decide on a wide range of scenarios.

Key employees who are not family members
By the time your succession plan is underway, you will most likely have a nucleus of key managers who will be important to the ongoing success of the company. By including them in your succession team, you can gain their support as well as key insights into operating policies as well as improving your chances of retaining them. Your customers will also gain reassurance that future business relationships are not going to be subject to surprises or unanticipated shifts in services.

Insurance advisor
Companies with multiple owners frequently use buy-sell agreements funded by life insurance to fund the transfer of ownership upon the death of a partner. In a growing business, two ongoing insurance issues must be dealt with:

  • Periodically reevaluate the company's worth and increase the insurance coverages accordingly.
  • Don't let the policies lapse!

Advisory board
Consider bringing your team together in the form of an advisory board that can collectively participate in planning discussions. Consider including:

  • A succession plan consultant. There are professionals and firms that specialize in succession who can facilitate working through the planning issues.
  • Members of your family.
  • Your Advisory Board should include outside business leaders who have demonstrated success in their own succession planning.

Thoughtful planning can strengthen the company

Your advisory board's planning will strengthen the company in ways not anticipated:

  • Your planning process may provide information and expertise to evaluate potential public ownership. For example, the plan should evaluate the future growth prospects of the firm. If the growth is attained, could the company become a candidate for public ownership and enjoy the benefits that go along with it?
  • You will reassure key employees that the company is carefully planning for the future. If no first generation children are qualified, the founder might consider selling to his employees possibly through an ESOP plan. See Selling Your Business.
  • Clearly establish lines of responsibility, now and into the future.

Coordinating the founder's and first generation's goals
Starting early is good for a number of reasons:

  • There will be more time available for you to evaluate different options for succession as the children are growing up.
  • Over time, you can evaluate your children's qualifications and earnestness to carry the business forward. Your children can gain work experience in the business to evaluate if they wish to take over the business or to pursue other goals. An offspring can demonstrate performance ranging from exceeding your fondest expectations to the unhappy conclusion that the offspring is hopelessly unqualified to carry on the business. On-the-job training can begin in high school, or earlier, with emphasis on a start-at-the-bottom approach to experience in job responsibilities.
  • A formal business education will also be important for your family successor including a college degree in business administration including accounting and preferably going on to a masters degree in business. Simply put, the more formal training the better your offspring will be prepared to keep abreast (hopefully ahead of) highly trained business rivals.
  • You have sufficient time to ensure you have the funds needed to retire without depending on the company for ongoing income.

Get your potential successors involved in job responsibilities that will give them insights in every facet of the business. It will be important that their personal feelings and goals be considered. Evaluate the strengths and weaknesses of all potential successors, keeping in mind what will be best for the business.

While most entrepreneurs would like the business to be taken over by their children, if none have the training or interest in doing so, family succession is not a realistic option. In such cases, the founding entrepreneur must look to other options including selling the business or closing it.

A successful entrepreneur built up a robust metal working business. As much as he desired to have the business taken over by one of his three sons, they all developed other interests. Two of the three went into medicine and the third into a music career. The founder's remaining option was to sell the business, which he did to his employees.

Your succession plan will have a much better chance if your successor works in the business long before taking it over.

A national chain of food shops is now run by a CEO whose father was the founder. The son started in the business during his first year of high school. He worked in food service duties including washing floors and taking out the trash. He grew to love the business and his early work experience was invaluable later on when no one could fool him on how to run a store.


The goal of a succession plan will be to accommodate each family member. But keep in mind that the objectives of family members can often differ from those of the founder. During the founder's lifetime, the business came first. Problems can result if the generation taking over the business is focused on other interests.

To avoid this problem, a common approach is to separate the business from the family assets. Family members who are not active in the business get family assets while those who work in the company get shares. Here is an example of the role a good lawyer can play in resolving sibling goals:

A man successfully created a business and brought in one of his children, but not his wife or other children. His desire was to reward the child who is in the business to the exclusion of the others by leaving the business to the one child but leaving his wife and other children equivalent assets.

But often there are not enough other assets to divide the estate in the manner he desires.

The lawyer had the business recapitalized to give the wife and other children notes and/or preferred stock. Any increase in the value of the business will go to the child who is working and making the business grow but requires him to pay off his mother and siblings through the notes and preferred stock. Alternatively, the nonvoting common stock can be used if the father wants the siblings to share in the growth but without the right to interfere with the running of the business.



  1. Start your transition plan now.
  2. Evaluate the interest of family members to run your business.
  3. Take time from business to plan for succession.
  4. Retain a professional succession advisor.
  5. Document and update your succession plan.
  6. Create a succession team including family members.
  7. Have specialized tax and legal advice.
  8. Resolve sibling's goals and discords.
  9. Look to other options if succession is not realistic.
  10. Involve your successor in business long before taking over.


  1. Put off business succession planning.
  2. Assume that family members are qualified.
  3. Assume that family members are not qualified.
  4. Disregard the value of an advisory board.
  5. Overlook planning due to lack of knowledge.
  6. Ignore potential adverse tax complications.
  7. Fail to keep life insurance policies updated and in force.
  8. Dismiss the possibility of employee ESOP ownership.
  9. Disregard the personal goals of potential children successors.
  10. Combine business assets with family assets.
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Featured Video: How Do You Plan for Family Succession of the Business?