Skip to main content

Transitioning Your Family Business to the Next Generation

Use This Guide for a Smooth and Successful Transfer of Power

Family-owned businesses employ 63% of workers and contribute 57% of our country’s GDP. In many ways, they are the backbone of America. Despite their strengths, though, one common stumbling block is transitioning your family business to the next generation. In fact, according to the Family Business Institute, only 30% of family businesses make it to the second generation.

If you own a business and you hope to pass it on to your children or grandchildren when you’re ready to retire, the tips below can help you navigate the process and protect the company you’ve worked so hard to build.

#1. Get specific with the future you envision and create a business plan to match.

It’s nearly impossible to create an actionable business plan for your company’s future without first determining your vision for that future. And, if you hope to pass on the business to your children and grandchildren, it’s helpful to get their buy-in on that vision upfront. Sit down with your family to define the company’s current state and where you’d collectively like to see it go in the future. From here, you’ll be able to better determine things like what, if any, technology you’ll need or what capital requirements there will be, among other issues, and put a plan in place to achieve your goals.

#2. When it comes to business matters, treat the next generation as employees first, and family second.

It’s important that the next generation doesn’t believe that their position within the company is a sure thing simply because they’re family. They must see working for the business, and eventually taking the business over, as the opportunity that it is, otherwise, they’re likely to take it for granted. As an owner, be very clear about the employment conditions of your children and grandchildren, and be sure to treat them in the same way that you treat your other employees. This not only gives your heirs valuable employment experience, but it can help to ensure that your other employees don’t spot favoritism and develop a negative impression.

#3. Establish a clear governance structure.

No matter how small the business, every company should have some sort of professional management system in place. For those businesses that can afford it, establishing a board of directors made up of experts, attorneys, accountants, and other professionals from outside of the family can help steer the business in the right direction when significant decision points arise. However, if you can’t afford a board of directors, putting together a board of advisors made up of relatives, attorneys, and friends can be a helpful place to start.

#4. Determine if you will be gifting the business or selling it.

When creating a tour plan for transitioning your small business, one of the biggest decisions you’ll have to make is whether the next generation should contribute any capital to buy the company or if it will be gifted. Typically, family-owned businesses tend to meet somewhere in the middle of the spectrum. It can be a positive thing to have the next generation show an economic commitment to the company – whether that’s through a simple buy-out of the business or from dedicating an agreed-upon number of years to working for the company before taking over.

#5. Plan accordingly for the time it will take to properly train your successors.

Transitioning your family business is going to require specific training for your successors – possibly quite a lot of it. It can be helpful to outline the timeline for such training and the specific skills and experiences needed. Many experts agree that proper training takes about 5 – 10 years, so you’ll want to be adequately prepared to make the transition within that timeframe.

Any plan for transitioning your family business should also clearly define the conditions of your own exit. Put in writing what role you intend to take with the company after you retire, if any at all, as your plans can impact the training timeline for your successors, too.

#6. Focus on management first before jumping straight to ownership.

Transferring a company to the next generation isn’t just about naming your children as owners. There are likely to be important intermediary steps before a hand-off takes place. One of the more crucial steps is to ensure that the new generation is trained appropriately, not just in day-to-day business matters, but in management and leadership. This can be done by putting your children or grandchildren into management roles where they’ll be able to not only learn the ins and outs of the business but also gain skills and prove themselves as competent leaders, too.

#7. Address family conflicts head-on and keep them separate from business matters.

Your business runs a great risk of failing if you and your children bring interpersonal conflicts into the day-to-day operations of the company. It’s critical that you sit down as a family and work to resolve any lingering or ongoing conflicts so that you can focus on moving forward as a family and as a business. Consider coming together to create a family pact – a document that governs how you will all behave within the company and how conflicts should be resolved moving forward. Having that sort of framework in place will help ensure everyone is on the same page and understands exactly what is expected of them regarding their attitudes and behaviors.

#8. Collect, organize, and safeguard key documents.

When you’re transitioning your family business, there are key documents that you’ll want to pay special attention to:

  • Family Pact: As mentioned above, this helpful document should establish the terms and restrictions required if a family member wants to do something like transfer their shares of stock. It should also outline any rules should someone want to join or leave the company, define how conflicts will be resolved, detail any education and training requirements necessary, and include all compensation and promotion policies.
  • Will: This details what will happen with company stock should a shareholder pass away.
  • Code of Conduct: This outlines the rules and expectations of behavior that family members are expected to uphold within the company, as well as addressing confidentiality expectations.

Concluding Thoughts for Transitioning Your Family Business to the Next Generation

Owning a family business can be incredibly rewarding. It can provide an income while also strengthening family ties between generations. When you view your business as a family legacy, it’s essential to be intentional about how you’ll pass it from one generation to the next.

At Paces Ferry, we keep our clients at the center of everything that we do. Our team of advisors is dedicated to helping our clients meet their financial goals and achieve financial freedom, and that includes business owners. If you’d like to start a conversation about the future of your family business, please contact 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.