Are You In or Out? Succession Planning for Family Business Owners with Children Both In and Not In the Business

Diane and Tom, owners of a small manufacturing business, are proud of their daughters and the careers they’ve chosen. Megan, their oldest, has taken over operations of their business. Their younger daughter, Shannon, is a pediatrician. Diane and Tom built their business and raised their children with similar integrity, resulting in a well-respected business and two strong and successful daughters. Fairness has always been very important to Diane and Tom. As they approach succession planning, they want to be sure their daughters are treated equally. Therefore, they intend to split their business equally between the two daughters. But is equal truly the fairest option?

The Whole Picture 

Like many family business owners addressing their succession plan, Diane and Tom zero in on the family business and neglect to include their entire estate in their planning efforts. Proper succession planning considers assets beyond the family business. Founders should evaluate their whole estate and identify assets outside of the business that can also be bequeathed in an effort to achieve fairness.

When determining the future ownership of the business, family dynamics will certainly play a role. Sometimes leaving a portion of the business to a child not involved in the day-to-day can result in a significant amount of turmoil. Those in the business may feel slighted, as though their contributions to the company went unnoticed. Those not in the business may not have interest in becoming a co-owner. The solution most often recommended is to leave the business to children who work in the company and allocate other assets to children not in the business.

Maintaining Leadership When Going Equal

However, some families may choose to leave equal shares of the business no matter the participation. When this occurs, maintaining leadership through an outside, experienced professional can mitigate issues around family dynamics.

Remember, successful succession planning goes beyond determining ownership. It also involves developing new leaders. While the founders’ children may be the owners of the company, it is important to consider if they have the talents, skills and experience levels needed to lead the company in that moment or in the future. Hiring external C-suite leadership teams to help navigate the family asset can benefit all those involved.

Communication

Regardless of how succession is determined, communication is the most vital component prior to the transfer of ownership. Open and honest communication eases the business transition and also helps to maintain strong family dynamics during an emotional time. The goal is that no one feels left out and no one feels misunderstood. Communication brings the family together and puts everyone at the same table with the same information. Good communication ensures:

  • If the transition occurs due to the passing of the founders, assumptions may be made and explanations become impossible. Face-to-face communication while the founders can still impact the business leaves both in a stronger and healthier position.
  • Including legal counsel and tax advisors in these conversations can be helpful as they can address tax advantages and legal protections.
  • Family members who are not a part of the business can better understand the purpose behind decisions. They can also gain a better understanding of their role in the future of the business.
  • There is a much higher chance of litigation when succession plans are not communicated to family members while the founder is still alive to address questions and concerns.
  • Family meetings provide just the right vehicle for working on a succession plan together.

For Diane and Tom, addressing succession planning now follows the path of integrity that they’ve traveled as they’ve raised their daughters and built their business. By looking at the whole picture and addressing leadership continuity, the succession plan becomes less about assets and more about harmony.

Communicating and sharing the plan maintains that harmony after they’re gone. For more information about succession planning for founders who have children both in and not in the business, contact us today.