Succession Planning for Family Business: What You Need to Know

March 21, 2023

Succession planning is one of the most emotional and challenging aspects of running a family business. Family owned business succession planning requires owners to look to the past and the future, be honest with themselves about their successor options, and open all doors of possible communication. Owners  must remember to always keep the best interests of the company in mind, even if it means disappointing family members.Succession planning is inevitable. At some point a business will undergo an ownership transition, ready for it or not. Succession in family businesses is most successful when the organization is prepared for it. These businesses create an exit strategy that supports the owners’ personal goals as well as the broader goals of the organization.

family business succession planning

What is Succession Planning?

Succession planning is a written plan for the transfer of ownership of a company. Succession plans are most often associated with the voluntary retirement of owners, but are also used to ensure business continuity for unplanned and involuntary exits, such as death or disability. A succession plan determines who will own controlling shares of the business, and who will run the business or take on leadership roles. In family-owned businesses, the obvious choice is the owner’s heirs. Yet sometimes there are no heirs.  They are not interested, or they are not the best choice. Family owned business succession planning allows the owner to really think about who is best suited for continuing the family business and how the transfer of ownership will happen.

Why is Succession Planning Important for Family Businesses?

Family businesses benefit enormously from succession planning. And yet, as of 2021, only about 30% of family owned businesses have a succession plan. These smaller businesses do not usually have the same degree of professional management as larger corporations.  When an exit occurs, family businesses often don’t have a ready team in place with clear action steps. This can cause the business to fail when the leader-owner is suddenly no longer in charge. Succession planning for family businesses gives owners time to mentor and train up the next generation of leaders so they are ready to step in when the time comes. A succession plan can also ease worries when an ownership transition occurs.  Family members, employees, shareholders, customers, and even the local community can all be affected when an ownership change occurs. A succession plan minimizes disruption to the business and helps ensure uninterrupted continuity of services.  Succession plans can provide tax benefits to the owners and successors, but perhaps the single biggest benefit of a family business succession plan is that it gives the owner control over how  an exit will occur, and who will beleading the business going forward. Owners can create their legacy their way and on their own terms.

The Process of Family Business Succession Planning

The process of succession planning for a family business is similar regardless of industry, value, age, or size of the company. Successful succession plans take into account business needs and organizational dynamics, as well as family dynamics. The planning process should include these steps:

  • Family Discussion All family members must recognize and accept the benefit and need for a formal succession plan.
  • Set Goals Once the decision to create a succession plan has been made, the next step is to identify goals for the plan related to yourself, your family, and the business.  Goal setting should involve everyone in the family who will be affected by the transition so that all voices are heard, and every necessary position and need considered.
  • Identify Key Players and Define Roles and Responsibilities After you have gauged interest and set goals, it’s time to define roles and responsibilities based on the next generation of leaders.
  • Obtain an Independent Business Valuation Find out how much your business is worth. This can affect the transition option you choose.
  • Explore Transition Options Learn about the different transition options and how they will affect you, the business, and your heirs.
  • Inform Management Succession Inform company management of the plan and address their concerns to obtain support and buy-in.
  • Communicate This step is vital to a smooth transition. Communicate the concretized plan to all interested stakeholders including family members, employees, your board, and shareholders.

Our best piece of advice is to start early. The earlier the process is started, the better for your family business succession plan. Succession plans can be years in the making. Early planning provides plenty of time to think about the possibilities, explore your options, mentor new leaders, and get the rest of the company comfortable with the idea.

Challenges of a Family Owned Business Succession Planning

Choosing a leader. One of the most difficult challenges in family business succession planning is deciding who will take over the family business when the owner exits. This is an emotionally-charged decision that can cause strife within families and even among senior leaders. A different challenge could arise as well – finding a family member who wants to run the business. Communication is key here. Don’t keep your succession plan a secret. Recognize the need for a clear, well thought out succession plan for your family business. Another challenge? An owner must be willing to look into the future and admit that the time will come when they must give up the reins. This can be hard for self-made business owners to do. Remember succession plans are not one-size-fits-all. A unique business will need a unique succession plan. Be aware of how the transition will affect employees. The most successful family business succession plans obtain buy-in and support from key staff members. This requires owners to be upfront and honest about the transition plan to gain employee trust and support.Time! Simply running a family owned business often takes up all of the owner’s time. There’s not the bandwidth to devote the time and thought necessary to creating an appropriate succession plan and so, the plan is never made. Take the time now. Beyond these interpersonal and emotional challenges, there is the practical challenge of understanding the legal and tax implications of different transition options and finding the professional guidance and assistance needed to actually select and create a business succession plan.

Family Business Transition Options

No two businesses are alike, which is why there isn’t a single tried-and-true succession plan that any business can adopt. Successful family business succession plans meet the needs of the business, the owner, management, and the family. There are several different ways business ownership can be transferred, depending on your goals. Transition options include:

  • Transfer ownership to a family member(s)
  • Enter a buy-sell agreement
  • Sale of shares via promissory notes, to be paid with bonuses or after-tax distributions
  • Gift shares
  • Create as trust as shareholder
  • Management buyouts
  • Sale to employees through an Employee Stock Ownership (ESOP) or cooperative
  • Sale to a 3rd Party
  • Liquidation

Legal Considerations in Succession Planning for Family Businesses

There are many variables, and legal, tax, and compliance issues at stake in succession planning that professional advice is a must. For example:

Your business’s multiple owners decide on a buy-sell agreement succession plan. One owner leaves suddenly and unexpectedly. Are the other owners allowed to purchase the share before a public sale? Take legal counsel.

The succession plan that your family owned business has adopted is management buyout. Do you have a line in the contract regarding the buying manager’s compensation levels? How can you guarantee the good intention of the buying manager? Seek legal counsel.

Your family owned business has opted for an ESOP. ESOPs require the assistance of a consultant and other tax and legal professionals. Does your company have ready access to a trustee who can make fiduciary decisions in adherence to the ERISA’s requirements? Schedule a consultation with one of Aegis’ ESOP experts.

To ensure the plan is legally and financially sound and to ensure documentation accuracy, you will need to consult attorneys and accountants who are familiar with the succession plan your family business has selected.

Tips for a Smooth Succession in Family Business

Communication in succession planning is integral to a smooth transition.

  • Become a master of your succession plan options. You are not able to compare your options if you do not know the weight of each.
  • Anticipate the concerns of your chosen successors. In their shoes, what would you be most concerned about? Family dynamics? Employee opinions? Customer satisfaction? Information transfer?
  • Talk with the next generation of leaders. And Listen. What do they consider the best succession plan for your business? Do your top choice owners want to be your successor? Ownership is hard. Take their answers seriously. There is a reason you want them to lead your family business.
  • Have the hard conversations. Accept that they may go poorly. Change is difficult. However, an honest and clear conversation can make the path forward apparent.


You may not want to think about the day when you won’t be running your business, but you will be glad when you do. A succession plan is not a bad thing. It’s not the end of your business. It’s the right thing. It’s the smart thing. A family owned business succession plan is a positive step that can protect your company’s future.If you are thinking about a ESOP as succession strategy for your family business, contact the ESOP attorneys at Aegis Trust Company. Our experts are happy to discuss the ins and outs of an ESOP as a business succession strategy and what it would look like for your company.

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DISCLAIMER: The Articles displayed on this website do not constitute legal advice, nor do they substitute for the advice of qualified professionals. While the Articles displayed on this website are designed to provide information regarding the subject matter covered, we cannot guarantee the accuracy of any statements contained therein. If any legal advice or expert assistance is required, the services of qualified professionals should be sought.

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