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The First Commandment Of Family Business Succession: Plan Early

Many of my readers know that my background is family business. My book, The Prosperous Leader, talks about my father, who founded the family business in 1955.

I recently was invited to meet the owner of a successful family-owned business and his two sons who help run it. They ultimately wanted to know how to prepare the company for the next generation. (Statistically, only about 30% last into the next generation.)

The questions were many:

• "When do we start?"

• "Should the next generation run the company or should we hire an outside CEO?"

• "How does an advisory board work? How does a family board work?

• "We are interested in projects outside of the family business. Is that a good thing?"

• "What happens if we want to sell?"

• "Can we have all the kids help run the business? How would that work?"

• "How do we share the business equally and fairly without jeopardizing it?"

• "What would retirement look like?"

Planning early is a very important aspect of family business succession. It can take years to put everything into place, and the more time you have to plan ahead, the less pressure you create for yourself and others.

As there are so many details that go into a succession plan, it’s a lengthy process. You want to have as much input as you can from different trusted advisors, such as lawyers, estate planners, accountants, family business advisors, etc. in order to make great decisions.

Here are some components to think about when setting up a succession plan:

Taxes, Shares And Assets

How are the shares distributed? To whom, and how much?

How are other assets being distributed? How are those not in the business receiving assets?

What about taxes? Keep in mind that there are gift tax rules and estate tax ramifications.

Though this would be a worst-case scenario, if the business owner owns a majority or all of the businesses' shares and doesn’t have a proper will in place, upon his or her demise, the government might force what is called a "death tax." In cities such as New York City where you pay federal, state and city tax, this can amount to a huge number, which could force the heirs to sell the business or other assets.

With proper planning, this can be mitigated and planned for. Many will use life insurance or trusts etc., as it’s much cheaper to buy insurance at an earlier age in good health than at a later age in not-so-good health.

Even moving to a “friendlier" state as far as taxes are concerned, such as Florida, will mitigate this risk.


How is the successor(s) being brought in? If they are in the business, how are they being groomed to take over?

This step is usually a lengthy one, as it requires a lot of contemplation — especially when companies have senior managers in executive positions. How will they react to the next generation, if that's the plan? What timeframe will they need to be able to assume full responsibility? If only one family member will take over, how are they chosen over others? This can cause many issues if not prepared well in advance.

A family business owner I know planned ahead five years for this eventual slow-down and succession as CEO. He asked the non-family board members to take an active role in the grooming of his successors, create the plan and execute it. He was able to retire as chairman of the board, move to a friendly state and come in just for the monthly board meetings.

In a New York Times article, Abby Ellin wrote that the key elements of a successful family business succession are:

• A board that holds family members accountable (especially the CEO) and that meets three to six times a year.

• Formal family meetings where the business and family are discussed, at least three times a year.

• A yearly strategic planning event where the company and the family are continually aligned as to what the goals are and what everyone is doing to achieve those goals.

At the end of the day, always remember the first commandment of family business succession: Plan early. It takes many years to do it right.

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