Navigating Family Succession Planning

Passing the Business to the Next Generation

by Korbett L. Roberts, CFP, ChFC, CLU, CASL, TCS Insurance

Deciding how to pass your business to the next generation of owners, whether your family, your employees or a third party can be a complex decision with many different factors involved. Most of the clients we work with find themselves stuck in the complexity or simply don’t know the next step they need to take in the process.

Statistics widely quoted by estate planning writers indicate that “only” one-third of all family-owned business are passed on to the second generation, and “only” 10% of family-owned businesses make it to a third generation. Our passion is to improve those statistics.

If it is so difficult to successfully transfer a business from one generation to the next, is there a way to improve the likelihood of success? We have found that taking a holistic approach the succession planning process greatly improves the likelihood of success. At bare minimum, the holistic approach will at least address the following areas:

Catastrophe Operating Plan

A document to protect the business, and all those associated with it, in the event of the unexpected death or incapacitation of the owner.

Or, put another way: What happens inside the business the day after a tragedy? Continuity of business ownership as well as operations will be crucial to preserve value and reduce chaos, including loss of talent and knowledge.

Business Valuation

A business valuation is a process used to determine the economic value of a business. It's a crucial aspect of financial analysis and decision-making for various decisions you will make in succession and estate planning.

Business Succession Planning

A written document outlining the goals and processes of how a business owner will be succeeded. This comprehensive strategy is designed to ensure the smooth transition of ownership and management of a business from one generation or owner to the next.

Estate & Succession Coordination

Review of estate planning and determining if it is supporting or an impediment to your succession plan. Typically, estate planning documents and the desired succession plan state two different outcomes. Aligning those outcomes is key to a proper succession plan. It is important to periodically review.

Financial Independence Plan

Planning your finances in a way that allows you to achieve a state where you no longer need to rely on employment or active income to sustain your desired lifestyle.

Executive Retention Plan

A plan to attract, retain and reward the people who help you build your business. These plans are particularly important for businesses that rely heavily on the expertise, leadership and specialized skills of certain individuals whose departure could have a significant negative impact on the company's operations, performance, or long-term success. Having a plan in place prior to any transition to the next generation is critical.

Capital Needs Analysis

An analysis of specific liquidity needs as it relates to your succession and estate plans. Are you able to meet short-term and long-term financial obligations, goals and growth objectives. It involves evaluating current and future financial needs, identifying sources of capital and developing strategies to secure the necessary funding.

Family Constitution & Shared Vision

Formal written document that outlines the family governance, values, principles, rules, and procedures governing the management and succession of a family-owned business or wealth across generations. It serves as a framework for promoting harmony, communication, transparency and alignment among family members involved in the business or wealth management. The shared vision can also include guidelines to bring future generations into the business.

Owners do not suddenly and decisively opt for a particular exit or succession strategy involving their children or key employees. Usually, family and business lives become entwined when children first begin to work in the business after school and during summer vacation. In such situations, many unspoken assumptions are made and promises given, often well before the full consequences of those commitments can be appreciated. In other families, careful consideration, adherence to the recipe and action, including the use of professionals, underlie the transition of the family-run business.

Including these eight ingredients in your succession planning process will give your insider transfer the best chance for success. For more information or guidance, please contact us by phone at (254) 913-9911 or by email at kr@tcs-insurance.com.

This blog post was sponsored by TCS Insurance. Visit their website to learn more about their services.

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