Should Your Children Play a Part in Your Business Succession Plan?

Familial Considerations for the Next Generation of Your Business

When you view your business succession plan from a strictly financial standpoint, you’ll cover a lot of ground. You’re likely to think through things like market valuations, trust strategies, taxes, and more. What you might fail to put enough thought into, however, is the more personal aspect of business succession. Specifically, you’ll need to decide whether to include your children in your plans for maintaining the infrastructure of your business after your eventual retirement or death.

If you have adult children with an interest in taking over your company, you’ll need to plan for efficiently transferring both equity and control – as well as how to do so fairly. Below, we’ll talk through four considerations to keep in mind as you explore the more personal and familial aspects of your business succession planning.

Consideration #1: Getting the Conversation Started

Succession planning isn’t a quick process. It will typically require multiple discussions over many months or years – and with multiple parties. You’ll certainly want to open the conversation with your financial advisor, even if you’re not ready to act on any specific proposals. More importantly, you should engage in conversations with your children to gauge any interest or expectations they may have – as well as whether they have the financial resources to buy the business if you plan to sell.

If you strongly believe they need to put in more time or sweat equity or gain business or financial acumen before taking over, your conversations should evolve to a place where you can clarify what exactly you need from them and, together, develop a framework and timeline for accomplishing it.

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Consideration #2: Think Outside the Box

Customary succession planning advice is focused on financial and structural planning, as well as on change management. For instance, how to structure and administer complex trusts or how to choose an experienced corporate trustee. What many financial professionals fail to mention – and what most business owners fail to consider – is what your succession plan will feel like on a personal level.

Take time to consider your answers to the following questions:

• Are you viewing succession only as an end to something – or as a new beginning, too?
• How might your sense of self evolve once it is less tied to your work?
• Will you still feel like you have purpose and meaning in your life?
• How will it feel to share or hand over control and discretion to your children?
• What values and priorities do you hope your children will carry forward in the business?

These questions aren’t easy to answer, but giving them some thought will inform the conversations you have with your family – and with yourself – as your succession planning moves forward.

Consideration #3: Recognize that Personal Fulfillment and Balance Matter to Your Children

Business founders tend to be people who spent a considerable amount of time and energy on passionately building their companies. So, if you don’t tend to think in terms of work/life balance, you’re not alone. However, you might find that your children want a balanced approach to work and family.

As the second generation of the family business, they probably won’t fully appreciate the risks you took in the early years or the challenges you had to overcome. The business might feel more like a reliable constant to them, especially if it kept them sheltered, fed, and educated as they grew up, keeping all their needs met – and many of their wants, too. They may lack the passion you have for the business, and they may even view it as just one career option of many. This is a key factor in why many businesses will start and end with the founder.

As you discuss your succession plan, ask your children to honestly consider whether they can find personal fulfillment taking over your company, as well as what kind of work/life balance they find important. If their answers aren’t in line with what’s required to maintain your company’s success, you may not be able to rely on them for long-term active management.

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Consideration #4: Confront Issues of Fairness Head-On

If you have more than one child interested in the business, issues of equity and fairness will have to be addressed. You’ll have to determine how to efficiently transfer control to the proper person or people while still distributing the benefits of your estate amongst all your children.

Consider which factors you want to prioritize:

• Equality
• Fairness
• Skill and experience
• Sweat equity
• Unique considerations, like a child with special needs

Things are easy if you have one child who is clearly the most interested and adept, while the others agree to take a backseat. This isn’t how these matters often play out, though. You’ll likely have to make some tough decisions.

Family dynamics are complex, and your decisions could create tension for years to come. Consider these questions:

• Would it be fair to place the financial futures of all your children in the hands of just one or two active owners?
• Should passive owners have input in business decisions? If so, how much and what does that process look like?
• Is it fair for the active owners to assume all the burdens of success or failure? How can it be mitigated?
• Might passive owners grow to resent their lack of control, or disagree with how company profits are spent?
• Could active owners grow frustrated with interference from passive owners they view as uninformed?
• May active owners resent an equally divided estate that seems to undervalue their time and energy?

Thinking through these questions can be stressful, but the process will help you plan for the more personal aspects of your business succession plan.

Final Thoughts

It’s important to realize that, though a business succession plan is about the future of your company, it could also have a significant impact on family dynamics – especially among your children. Whatever decisions you make, be clear about them – and as far as the situation and your company’s needs may allow.

Remaining cognizant of the familial impacts of your succession plan will allow you to make more informed decisions. With intentional planning and foresight, you can benefit the next generation and maintain the success of the family business, too.

If you’d like assistance as you work to clearly define and realize important aspects of your business succession plan, please reach out to us today.

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.