The difficulties of family succession planning

Ioannis Pashakis//December 9, 2019

The difficulties of family succession planning

Ioannis Pashakis//December 9, 2019


The decision to leave the family business in the hands of a relative can seem like an obvious solution, but experts warn that it can be complicated, emotional mess if you’re not careful.

For example, the founders of a family owned business are getting older and plan to give the company to their daughter. But that daughter may not love the business like her parents did, and the organization’s staff may not like having someone with less experience than them in charge.

Those possibilities can be avoided with careful estate planning, said Angie Stephenson, senior wealth adviser and COO of Domani Wealth in Lancaster.

When an owner is preparing to hand over the keys to their business, particularly if it’s to a family member, Stephenson suggests seeking external advice by developing a board of directors, or talking to a financial adviser.

“For our business owners, we are their sounding board,” Stephenson said. “We are frequently speaking to business owners about succession plans — where are they? What’s going on? Who’s their successor? How will they get liquidity for the company?”

A business owner’s family member can be involved with the company for years and have the skill necessary to be that organization’s next leader. However, owners need to ask themselves, are we forcing the company on that person? Do they truly want the role?

“When outside advisers interview the family members, what is frequently revealed is perhaps the family member feels obligated and they do not have the same passion to own and lead the business as the current generation may have,” Stephenson said.

The succeeding family member may care about the business and understand its products or services, but struggle as a leader if they weren’t trained properly. That new successor’s leadership can be challenged further by existing team members who may not accept a younger family member becoming their leader, she said.

The best examples of familial succession Stephenson has seen involved relatives who rose up the ranks at another company first, gaining valuable experience along the way, then brought that experience to the family business.

Just because a family member plans to run the future business, doesn’t mean that other members of the family won’t be getting an inheritance.

If a majority of the owner’s estate is the business, getting inheritance to the other family members can be left up to the new owner and create a difficult position for the family.

“If the child in the business has not planned to have the proper liquidity to buy out his or her siblings, it may be that the debt will be to his or her siblings for many years to come,” Stephenson said.

If no family members want to take over, the owner can sell. But selling can be difficult, too, if the buyer does not plan to keep the employees the owner has worked with for years.

Businesses generally sell for less if the owner stipulates in the sale that the employees must be retained by the new owner, said Stephenson. If a business owner hopes to make the most out of the sale, it is best to free the new owner to make the workforce decisions, including whether or not to move the company.

The Internal Revenue Service exempts anyone from paying a federal estate tax during the transfer of assets if their total estate value does not exceed $11.4 million or $22.8 million for a married couple. In 2025, that exemption will decrease to $5 million per person, meaning that anyone currently planning their estate could end up not being exempt from the tax, Stephenson said.