By Corinne N. Curtis, Partner
Every closely held business owner eventually confronts the same question: What happens to this business without me? Too often, owners wait until a health scare, a family disagreement or an unsolicited offer forces the issue. By then, available succession options are fewer, tax planning opportunities are narrower, and the stakes tend to be considerably higher.
According to recent surveys of family-owned businesses, most family business owners expect a meaningful ownership transition within the next decade, but nearly half lack a formal succession plan. The gap between intention and preparation is where families lose value and, in some cases, even lose the family business altogether.
Why Succession Planning Looks Different for a Family Business
Succession planning is not simply naming a successor. It requires aligning ownership, management and family expectations, which do not always move at the same pace. A child who is ready to run the business day-to-day may not be ready to own a controlling share. A capable non-family executive may need an equity (or at least phantom equity) stake to stay engaged for the long term. Siblings who inherit shared ownership may want very different levels of involvement, and unaddressed differences like these are among the most common sources of family business conflict.
Addressing these questions early, while the current generation is healthy, engaged and still building the business, allows for flexibility: phased transitions, buy-sell provisions, and governance structures that can adapt as circumstances change. Waiting until a transition is imminent removes most of that flexibility.
The Building Blocks of a Strong Plan
A well-built succession plan typically addresses six areas:
- Ownership and leadership transition. How ownership will pass (by gift, sale or a combination of both), to whom, over what time frame, and how ownership transition and transition of day-to-day leadership coincide with one another.
- Governance. Updated bylaws, operating agreements or shareholder agreements that clearly define decision-making authority (including roles and responsibilities for owners, the Board and executive management) and provide dispute resolution procedures to address conflicts or deadlock.
- Valuation. A defined, defensible valuation method, agreed upon well before a transition is imminent, so no one is negotiating the number and the process at the same time.
- Tax strategy. Coordinated giftestate and income tax planning can significantly affect what a family ultimately retains.
- Contingency planning. Provisions for incapacity or unexpected death so the business can continue operating without interruption or a leadership vacuum.
- Next-generation readiness. Prepare the next generation of owners to help understand their role as stewards of the family business through building financial literacy and a working knowledge of the business. Provide clear expectations as to qualifications for family members to join the business as employees and future leaders if they wish to do so. The next generation of leadership should be identified using a realistic, honest assessment of potential successors' skills and interests. Then, those leaders should be prepared for their role with a clear development plan that helps them acquire the skills they need to succeed and manage expectations as to timing.
It is critical to clearly communicate requirements and qualifications for the different roles family members may hold within the family business. Must a family member work in the business to hold voting equity? Does a family member have to attain a certain level of education and/or a period of outside work experience before joining the family business as an employee? Shareholder agreements or operating agreements and family employment policies are critical to ensure each family member understands the requirements for the various roles they may wish to hold in the business and can plan accordingly.
A Multidisciplinary Effort
Succession planning touches far more than corporate law. Tax attorneys help structure transfers to minimize tax exposure and effectively plan for future estate taxation. Trusts and estates attorneys coordinate the plan with the owner's broader estate plan, including how business interests are treated within a trust. Real estate attorneys may be needed if the business owns or leases property that should transition on a different timeline than day-to-day operations. Because Warner is a full-service firm, we build succession plans with the right specialists involved from the outset, rather than discovering gaps in the plan after a transition is already underway.
Tax Law Keeps Changing, and Timing Matters
Succession planning cannot be separated from tax considerations. Estate and gift tax exemption amounts, valuation discount rules and income tax treatment of ownership transfers have all shifted meaningfully in recent years, and a plan built around outdated assumptions can cost a family far more than expected once a transfer actually occurs. A plan that is reviewed regularly, rather than drafted once and set aside, gives a family the ability to take advantage of favorable tax windows and adjust course when the law changes.
Start Before You Think You Need To
The businesses that transition most successfully are rarely the ones that start planning once a transition feels imminent. They are the ones that start years in advance, revisit the plan as circumstances change and treat succession planning as an ongoing part of running the business rather than a one-time project completed and filed away. Owners who wait until retirement, a health event or an unsolicited offer forces the question typically have far fewer options, less favorable tax treatment available to them and less time to prepare the next generation or a management team to take over.
If your business does not have a current succession plan, or if it has been several years since you reviewed the plan you have, now is a good time to start that conversation.
Corinne Curtis is a partner in Warner's Corporate Practice Group who counsels multigenerational, family-owned businesses on succession, governance and ownership transition planning. Contact Corinne, a member of our Private Client Family Office Industry Group, or your WNJ attorney to start a conversation about your business's future.
