Family business transition: What to consider
Keeping a business in the family requires a succession plan that structures the ownership transfer and can be created with the aid of your Huntington Private Bank team.
By Larry C. Jones Jr. CPA/PFS, CGMA
Senior Wealth Strategist
Does your family business have a succession plan?
The married owners of a construction-related company in the Midwest saw their family business as more than a financial enterprise. It was a chance to leave a positive mark on the community and a financial legacy for their family for generations to come.
Yet, like many owners, they found the reality to be much more complex and challenging than the dream. They’re not alone. In one study of 200 Illinois manufacturers, 30% of family businesses survived through a second generation, and only 13% of successful family businesses lasted through three generations†.
In this case, the owners died before a transfer could be finalized. Because the business came to the children as part of the owners’ taxable estate, the heirs had to borrow money against the business to pay those taxes, significantly diminishing its value.
Without clear plans to follow, the children fought bitterly over finances, the company was drastically diminished, and the owners’ highest hopes for their financial legacy for their family went unrealized.
Despite such high stakes (or, maybe, because of them) many owners put off detailed transfer discussions. According to PwC’s 2021 Family Business Survey, only 34% of surveyed family-owned businesses have a “robust, documented and communicated succession plan” for the company‡.
The more planning that’s done, the greater the number of options an owner will likely have. Without planning, the options that are typically left over may not be what they want.
Many family businesses fail or are sold externally before the next generation can take over. Detailed, careful succession planning can make a big difference in the outcome. It starts with taking time—a valuable rarity in the life of any business owner—to come up with a plan that works for you.
Consider your goals
I’ve worked with business owners for more than 30 years–a good place to start is with the desired outcome. What’s the ideal situation the client is looking for? Once we start with the desired end result, we can help the client work their way backward.
How much (if any) involvement with the business do you want to have? Are your preferred successors willing and capable of driving the business? Can you objectively determine if keeping the business in the family is the best choice?
I always stress the ‘why.’ Is keeping the business in the family a desire for many, or solely the founder? There should be good reasons and buy-in from others for a successful business continuation.
Use your answers to address more specific issues, such as how much of the business’ value you may want to extract to finance the next phase of your life, and how the actual transition will happen.
What are your family's goals?
You may have some children who work in the business, some that don’t, other family members that have been associated with the business. How do you compensate everybody fairly? As with any family, things are all simple until they’re not.
Today, the definition of the family goes beyond mom, dad, daughters, and sons. For planning purposes, it’s important to clarify whether your definition of family includes members unrelated by blood or marriage.
Family considerations begin with clear communication, earlier rather than later. This can help minimize hurt feelings and family ruptures. (Ask your Huntington Private Bank advisor for ideas and resources to help you have that conversation.)
"The more planning that's done, the greater the number of options an owner will likely have. Without succession planning, the options that are typically left over may not be what they want."
Larry C. Jones Jr. CPA/PFS, CGMA
Senior Wealth Strategist, Huntington Private Bank®
Finding a successor for your family business
Whether it’s one of your children, an experienced employee, or someone you recruit from outside, finding the right person to manage the business and transferring leadership are essential aspects of transitioning ownership, which ideally should be a gradual process.
If possible, you should consider involving a trusted, experienced senior employee who can help mentor the owner’s chosen successor. That person can provide a perspective an owner may be blind to and help the owner divorce themselves from the personal connection with the potential successor.
It also may be beneficial that the possible successor gain experience elsewhere in the same field, or in an entry-level role in the family business. This may bolster their qualifications, and as importantly, help enhance their standing with the employees.
And if client and vendor relations are vital to your success, consider making sure any prospective successor has the time and access necessary to form their own relationships with these key contacts.
Structuring your ownership transfer
Exactly how you transition your family business will depend on several factors. Basically, your options include a sale, a gift, or a combination of the two.
With a family sale, the buyer, will typically take a loan from a third party or a form of seller-financing. They will then use the business’ assets or stream of income to repay that financing. If the transfer is in the form of a gift, the options are to gift it during the owner’s lifetime or afterwards, through a bequest.
Selling or gifting the business will have varying tax consequences that you’ll need to consider. A sale could be structured in installments, where capital gain taxes are recognized over a period of time. It may be owner-financed, or it could be some sort of recapitalization.
Handing the family business down as a gift during your lifetime means that you, as the owner, may be able to retain control while removing the business from your estate, possibly limiting estate and income taxes.
That way, the equity of that asset is slowly accumulating to the transferee. There are also charitable strategies that allow you to transfer the asset in a way that serves your goals, the charity’s goals, and your family’s goals.
Compensation for you and your employees
Removing liquidity for your own future will likely play a central role in your succession planning, depending on your financial circumstances and your plans for your next adventure. But estimating your future needs can be a challenge. No matter how successful your business has been, these questions should be addressed so the owner can make a viable plan.
You’ll also want to consider how a transfer will affect employees. With any transition, you risk losing long-term employees. You might consider working safeguards into the transition plan. Many times, the success or failure of a business succession transaction will be determined by long-term employees.
It’s really up to the owners: Should there be contracts offering guaranteed employment after the transition, deferred compensation, or some sort of bonus incentive program to help compensate them if they end up not liking the job after the transition and leaving without assisting with the transition?
Start planning your family business transition now
Companies that are more likely to beat the odds are those whose owners anticipate and prepare years in advance of transition. But it’s rarely too late to improve the chance of a successful transition. Even small steps can help. The sooner you’re doing it, the more options you may have. The more options you may have, the better chance you’re going to come out with a more positive result.
Whether that’s a sale or a gift, you need to look at the big picture to see what it is you really want.
However you transfer your family business, your plans will begin with you and your vision of the future. Your Huntington Private Bank advisor can highlight some of the options so you can make an informed decision.
The time to consider succession planning is now. If we can do this 10 years before the exit, it’s better than five, but even if it’s only one, that’s better than none.
Keeping your business in the family and establishing a financial legacy for your children and other relatives for generations to come requires a well-thought out and comprehensive succession plan. Call your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank® Office near you.
† Family Business. May/June 2016. “A Critical Look at ‘Survival’ Statistics.” Accessed October 26, 2022.
‡ PwC. n.d. “US Family Business Survey 2021.” Accessed October 15, 2022. https://www.pwc.com/us/en/services/trust-solutions/private-company-services/library/family-business-survey.html
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