Tips for a Family Business Succession Plan
How to get your baby on board in Ohio
on March 27, 2018
Updated on January 11, 2023
When starting or taking over a family business, you may not be thinking about how it will survive in the future. But succession planning is an important consideration at all stages of business development. In a family business, where relationships are more than professional and multiple family members can bring differing perspectives, this can be particularly critical.
Family Businesses Big and Small
Family-owned businesses, where more than one member of a single family shares in small business ownership and operations, continue to be a major part of the American economy. While it depends how you define “family,” these business owners head companies that are thought to comprise as much as 60% of the U.S. gross domestic product and 19% of the Fortune Global 500.
Where family is connected in this way, there’s often unique significance in sustaining a legacy. Equally, there may be desire in younger generations to forge their own path, or to cash out through a sale. Interestingly, only about a third of them make it to the second generation and about 12% make it to the third. Succession planning can fix that, yet only 23% of them are said to have one.
Family succession planning is like estate planning for a business, and considers questions and decision-making like:
- What will happen to the business if current leadership is no longer managing the day-to-day operations?
- Will it continue? And if so, who will run it?
- Under what terms can it be sold?
- What will happen in the event of your death?
Cleveland business attorney Jennifer Vergilii, of Calfee, Halter & Griswold, represents family business owners throughout their life span. “In my practice, it really runs the gamut in sizes of family-owned companies I work with,” she states. “For example, I just worked on the sale of a major Ohio lighting company that sold for $550 million, held by the second generation. I also have a $12 million automotive business client—held by the father, who has all of the voting power, and the second generation who has non-voting power but a large percentage of the economics. Whatever the size, the issues that come up are the same.”
Legacy = Vision + Planning
In approaching the succession planning process, Vergilii recommends a foundation of thinking through long-term goals and putting agreements in place. “The key is for that first generation, the ones who started the company, to create what they envision the legacy being,” she says. “Because if you leave it to the second generation, which is often the generation where a sale happens, it’s much more difficult to navigate.”
In contemplating a successful transition, Vergilii identifies two primary protections. First, she advises that “getting a good buy-sell agreement in place between the generations is absolutely, positively vital. That will set forth who can control when a sale happens. The terms of the buy-sell agreement is the most important part of succession planning.
“A close second,” she continues, “is making sure that there is ‘key man’ life insurance in place, so that if something happens, the funds are available to follow through on a buyout, and/or that money can be used to hire a CFO or president with really good skills, so the business doesn’t fall apart.”
Business planning attorneys, like Vergilii, recommend that you consider these issues now, and that you revisit them regularly. “Just like an estate plan, your ownership and exit strategy should be a living document,” she says. “I tell my clients to think about this on an annual basis, because things do change. Just because something made sense five years ago, it may not still make sense.”