There are many family-owned businesses in New Hampshire, and at Guyton/Forge, we often get questions about whether these businesses need to have “formal” continuity plans in place, even if their business is being passed down from one family member to another. We thought it would be helpful to share some of our clients’ most frequently asked questions around this topic.
Since we have a multi-generational, family-owned business, we don’t need a “formal” succession plan, right? When we retire, we’re just passing the business down to our children, so aren’t planning to put any legal paperwork or formal plans in place. Is that a problem?
Families often think they can skip the “formal” succession plans if they’re “just” passing their business to a child, sibling, or other family member, but that’s not true. If a company leader – or someone in another key business role – becomes ill,incapacitated, passes away, or decides to leave the family business for a planned retirement or for another reason, the company must remain stable during and after that transition. A formal strategic plan can provide stability and direction during these times of transition. Don’t skip this important step!
We find that families often resist talking about continuity planning because they’re worried it will cause fights or drama. But even family businesses need clear, formalcontinuity plans that outlines exactly what will happen if key people leave. Who will take over their roles? Who will be in charge? There are many decisions that need to be made in advance.
In fact, there would likely be more drama in the future if there’s no continuity plan in place. Things can get heated among family members. Relatives can get caught up in emotion and may have trouble staying objective during disagreements around what to do with the family business. If family businesses don’t do things “on the record” – and don’t have legal documents or formal continuity plans in place – it can cause tremendous problems in the future.
My kids already know that they’ll be taking over the family business when my wife and I retire, so what’s the point of having a continuity plan in place?
Planning ahead is essential, and will help ensure stability for your company in the future – especially during a leadership transition. Keep in mind that the continuity plan will cover more than just your children taking over as the business leaders. For instance, you’ll need to determine things like how you’ll retain high-performing, non-family employees during (and after) this transition.
It may not be pleasant to think about, but what happens if your business exit is sudden and unexpected – like an illness, incapacitation, or even a death? The succession plan needs to consider a variety of scenarios – not just a planned retirement. In any of these circumstances, your successors will need to demonstrate stability and continuity for your customers, employees, Board members, investors, and other key stakeholders. Additionally, they’ll have to instill trust among these important audiences during the leadership transition – especially if it’s unplanned and surprising.
Even if you know that your children are taking over the family business, it’s essential to plan ahead and have a thoughtful, strategic continuity plan in place. This carefully considered roadmap will be an invaluable guide during times of stress and uncertainty.
I’m planning to leave the family business to the “next generation” of my children, nieces, and nephews. How can I be sure they’re ready to take on the roles and responsibilities that I envision for them?
Properly onboard and train these successors for key roles. This process should start years before key leaders plan to leave, otherwise inexperienced successors could be placed in high-profile positions prematurely, and not be equipped to handle the responsibilities or pressure. Train the next generation properly, giving them plenty of time to learn the ropes. Over time, give them additional responsibilities to build their skills and confidence. Provide them with necessary education, networking opportunities, on-the-job shadowing, mentorship, and anything else they need to grow into their expected roles.
Who should be involved in the continuity planning process?
Your leadership team should work with objective professionals, including an attorney, accountant, valuation expert, and a trusted financial professional, who can help you consider the many components of your continuity plan. For instance, if you have fourchildren, and your oldest child is taking over your family business, what do your other three children get? How do you equalize it? Your financial professional will help you develop a continuity plan checklist with important details, like determining when and how family members can work in the business, how they’ll share the profits, who will serve in various roles, and how to train the next generation of leadership.
And, while you’ll likely involve your family members in this process, it’s also important to involve non-family stakeholders in continuity planning.Key stakeholders – like mission-critical, non-family employees – should be included to ensure that their perspectives are considered, and they feel invested in the process and outcome.
It’s also very important to review current succession (buy-sell) documents and the positioning of company-owned life insurance. This is necessary because of the June 2024 Supreme Court ruling that significantly changed the valuation and inclusion of the life insurance relative to estate and income taxes. The impact is significant and can be dramatic, so it is essential to review these strategies now.
We’re working on our succession plans now, but I just don’t see my oldest son taking over as the CEO of our family business. He’s not a natural leader, and I don’t think he would thrive in that role. How should I handle this?
Consider each family member’s skill set, personality, and experience and then determine where their talent would be best suited within the company. Don’t just automatically assume that your eldest child will be the company’s CEO if they’re not a strong leader. Maybe your youngest child – or someone else within the family – is better positioned for that role because of their skills, experience, and ability to motivate and lead.
We have a business that’s been in the family for generations, but no one in the next generation seems interested in taking it over when the current leaders retire. Now what do we do?
Develop a Plan B. Transferring the business to the next generation only works if someone from the younger generation wants to take over that role and has the skills and ability to do so. But, sometimes, that’s not the case. Maybe they want to pursue a different type of career, or they don’t have the skills or capabilities to run the business. Therefore, the continuity plan may need to shift to an “outside” buyer, who could be part of your “business family,” like a key employee who wants to buy and run the company, or it could be an outside investor. A critical component of continuity planning – especially if you’re selling to “an outsider” – is ensuring that the business is ready for sale, which can take years to achieve.
It looks like we’re going to have to sell our family business to an outside investor. What should we do to prepare for this?
There are some steps to take when selling to an “outside buyer” that are different than passing the business along to family. Notably, you’ll have to ensure the business is ready for sale. First, you’ll have to get yourfinancial records in order, and make sure that you can show profitability. Also, demonstrate that you have numerous loyal customers and a healthy sales record. Show that you can define your market position, your business is strategically positioned, and it’s differentiated from the competition.Show that you’ve built a strong, positive company culture that can retain top talent, and demonstrate that your employees will stick around during and after the leadership transition. A potential buyer wants to see all these things.
As a family business owner, what else should I do to prepare for my retirement?
Build up your own personal balance sheet before transitioning your business, whether you’re passing it to family members or selling it to outside buyers. This takes years to accomplish. Often, as a business owner, you put a lot of your cash flow back into yourbusiness. As part of continuity planning, you must change that cash flow pattern andbuild up your own personal balance sheet, so you won’t have to squeeze every last dollar from the sale of the business.
Take some cash flow and put it into your personal balance sheet, whether you buy real estate, invest it, or do something else. Start building up your assets outside of the business. Talk to your financial advisor about the best way to do this to maximize your successes.
If you’re a family-owned business with a transition ahead, let’s talk about creating a sustainable plan for future generations. The Guyton Forge team is here to help you achieve – and exceed! – your financial goals.
At Guyton-Forge, we offer the expertise of a big firm with a small town feel. We customize our approach (and our advice) to meet each client’s specific situation, needs, and goals. We’re proud to do things differently – it’s part of what sets us apart as a friendly, high touch practice. We offer extensive experience and knowledge, creating strong, long-term relationships with our clients.
