Considerations for Building and Transitioning
the Family Business

I’ve often thought that the process of building a business from the ground up is akin to giving birth and raising a child. In the daily challenge of raising a child, parents are laying the groundwork for the inevitable moment when their child will venture into the world to carve out their own identity. They anticipate that day, filled with pride and a hopeful heart. They trust the daily lessons they’ve imparted will shape their children’s choices and look forward to seeing the magnificent things they will accomplish on their own.

Similarly, business owners face daily challenges while building and growing a business that at some point may need to carry on activities without them. This is especially important when the business represents a significant portion of the family wealth, or is providing a means of ongoing financial support to family members. With the best intentions, many business owners may lose sight of the end while struggling to navigate the day-to-day challenges of supply chain disruption, finding qualified employees, inflation, and customer retention.

I’d like to suggest that incorporating the following activities while working to build a business will increase the chance of successfully maximizing wealth, and the opportunity to have the business succeed without you!

  1. Start early to identify and groom potential successors within the family or among key employees. Establish clear roles for these individuals and communicate expectations. You will potentially learn more about their true capabilities and desires much earlier in the process, giving you greater flexibility in the future.
  2. Open and transparent communication is vital. Discuss a potential transition plan with all family members involved. Prepare a communication plan for those family members who aren’t involved as there may be unspoken expectations which could cause problems in the future.
  3. Know what your business is worth. Determining the fair market value of the business is critical to ensure a fair deal during a sale, or in the event you intend to provide an equitable distribution to family members who aren’t involved in the business.
  4. Surround yourself with good advisors. Engage legal and financial professionals with expertise in business succession. They can guide you through the legal complexities, tax implications, and financial considerations associated with the establishment and transition.
  5. Evaluate the business structure. Consider whether the current business structure is optimized for tax efficiency, as well as aligned with the eventual goals of the transition.
  6. Develop a solid estate plan. Develop a comprehensive estate plan aligned with your family goals. This may include a buy-sell agreement, life insurance, trusts, wills, durable powers of attorney and advance health care directives.
  7. Consider how the transition will feel to customers and employees. Develop strategies to ensure a seamless transition that maintains business continuity, preserves relationships, and enhances customer and employee confidence.
  8. Build financial stability. Work towards increasing the financial stability of the business. Address any outstanding debts via thoughtful planning, streamline operations, and optimize financial performance to enhance the attractiveness of the business to potential buyers or family members.
  9. Practice good financial recordkeeping. Due diligence during a sale will be made much easier if accurate and up-to-date financial records are available. This documentation will also be crucial to family members and key employees who may need to unexpectedly pick up where you left off.
  10. Acknowledge and address emotional considerations. Understand that family dynamics can play a significant role in any business transition. Acknowledge these issues and openly discuss expectations and concerns to avoid problems down the road.
  11. Invest in professional development for key employees and family members. On-the-job training and formal education are important; however, assigning a significant project to a key employee can be equally valuable, potentially revealing perspectives and angles you hadn’t thought of!
  12. Plan for change. While it can be quite satisfying to establish a business succession plan, know that life happens! As your family and the business evolves, your strategically crafted succession plan will be the foundation from which you can pivot when unexpected events occur. Therefore, I believe good planning is never wasted.

It is important to note that the above considerations are not ranked in order of importance, but intended to be considered overall, and executed along a continuum that is best suited to your specific circumstance. Ultimately, you should trust that the daily efforts put forth, and the lessons you’ve imparted will shape the business legacy to which you’ve given birth.