Being in jeopardy is not an unfamiliar state for a business, as they are constantly evolving to survive, retain key talent, and adjust to new circumstances and demands from their customers and partners. The fact that there are always unknowable risks for the owners of businesses just means that they need to take very seriously the known risks that affect every business regardless of the changing environment.

Is travel a part of your retirement plan?

Many family businesses don’t survive beyond the first generation, and most don’t survive into a third generation. Why?

Even though many business owners pour their souls into successfully creating a business that could last generations, the challenge of creating a successful transition is difficult with every generational shift.

The reasons for the death of any business are as varied as businesses themselves.  It could be because of the burden of dealing with death taxes, or family dynamics and arguments about roles and compensation, or that the product or service provided simply isn’t in demand anymore. Perhaps the most prevalent reason is that while a business may live hundreds of years, key employees and active owners whose soft skills and guidance are sometimes underappreciated simply cannot bridge that gap, and there isn’t anyone to take over the reins.

Because businesses have the ability to outlive their owners, their age doesn’t determine what their lifespan will be. Some businesses last hundreds of years, and some plan for well beyond the years of anyone currently involved in the business. Having that plan doesn’t mean that it will succeed, or won’t change along the way, but addressing business succession ahead of when it becomes necessary may allow a business to deftly navigate the issue with each round of leadership.

If you want the business to survive – Identify future leaders inside and outside the family

Leadership doesn’t happen overnight, and mentorship and training may go a long way to positioning the business for a successful transition. Answer questions such as:

  • Are there family members who will participate in the business, who eventually will take command?
  • Will key employees be in a position to acquire the business, with the skills needed for continued prosperity after the owners leave?
  • How will these individuals be groomed to meet their future responsibilities?

Although some of the answers may seem obvious to the owner, that doesn’t mean they are obvious to the employee or prospective employee. Even for recently started businesses, sharing the succession plan may have added benefit of attracting and retaining key talent that know how they are building their future and what their stake in the company should be. Some employees may find that the succession plan does not conform with their expectations, creating a feeling of the lack of upward mobility, motivating them to seek that mobility elsewhere. Having an alternative plan and private conversations to discuss lateral mobility in place of upward mobility may be helpful in those scenarios.

When some questions are answered, others are raised too. A candidate that is currently the COO may be groomed and ready to step into the CEO’s position, but suddenly there is a void for their COO position as they can’t do both jobs at once. There may be a plan to fill that position as well, which may lead to a void somewhere else. Should external help be brought in, it has the potential to create an exit of different employees expecting to move upward. Managing these expectations ahead of time may lead to less strife during these transitions.

How to juggle interests by multiple family members

If any family members will be active in the business, it is important to get some of the business’ equity into their hands early on. An ownership stake provides a critical incentive, and there may be long-term tax advantages as well.

If some family members are taking a more active role than others and the goal is to treat them equally, the resolution could involve having voting and nonvoting ownership interests, or having a weighted distribution of assets outside the business interest.

Another idea to explore is the use of a trust to manage the ownership of the business. This can provide for great flexibility, while protecting the business assets from claims by creditors of the heirs. The trust document will outline the hopes and expectations of the trust creator, regarding both the operation of the business and the rights of the beneficiaries. The trustee may be given considerable discretion, if that is appropriate, and a corporate trustee will be required by law through their fiduciary duty to provide a non-biased approach that may preserve family harmony.

For owners seeking to retain some income from the business after they retire, the sale of the business to an intentionally defective grantor trust has the potential to convert business equity into an asset with the characteristics of a bond.

A trust officer, such as those at Arvest Wealth Management, could help with trust planning. However, given the evolving tax environment and the inherent complexity and unfamiliarity of estate planning, owners of a family business may prefer a team to create and implement the business succession plan, calling upon an accountant, estate planning attorney, insurance agent, and banker alongside family members.

Assembling the team transforms succession planning from “something we need to get to” into an active process of executing current tasks and supervision of the plans that the team develops.

Whether your business has only recently emerged, or is getting ready to be reborn into a new generation, we’d be pleased to be part of its continued growth and success.


This content has been provided by Merrill Anderson and is intended to serve as a general guideline.

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