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How To Talk Through Transitioning a Family Business

These conversations – if handled thoughtfully – can make your business and your family stronger.

Succession planning remains a perennial problem for family businesses: According to a recent survey of family businesses, only 34% of U.S. family businesses report having a robust, documented and communicated succession plan in place. As successful family business leaders, we all understand the importance of a plan. So what’s getting in the way?

Many times, it’s the same fear which keeps an individual from completing a will or broader estate plan – these conversations could open the door to awkwardness, family in-fighting or new realizations that our loved ones’ wishes might not comport with our own. If you have these concerns, it’s important to recognize two truths about these discussions’ relational impact:

  1. These concerns may be valid: Family business succession planning can be highly emotional, and these conversations, if not handled carefully, can significantly damage the business and the family.
  2. That said, avoiding these discussions doesn’t make potential problems go away – it just gives you less time to address them.

Fortunately, there are steps you can take to make these conversations easier for everyone, including yourself. Here are five keys to navigating discussions around transitioning a family business.

Name It

Any time you face a personal or professional challenge, especially one which invokes complicated emotions (whether yours or someone else’s), it can help to identify the source of these complex feelings. What about transitioning the family business is challenging, and how does it make you feel? You might be surprised to find others share your thoughts and feelings. Even better, naming the complicated emotion(s) invites vulnerability, which in turn sets an inviting tone for important discussions. It says, “Let’s solve this together.”

Questions To Ask Yourself: What about this business transition is keeping me up at night? Have I shared my concerns with my family?

Promote Open Communication

Just as you might hold a business strategy session, hold these same types of meetings with your family. When families engage in open communication, they learn to work together and create opportunities to share information that weren't available before. For example, many heads of families assume when it’s time to retire, a son or daughter will step up to manage the business. But what if they have no interest in doing so? Or what if the reverse is true, and a family member who had shown no interest in the family business wants to get involved? An open dialogue might also reveal concerns or conflicts which can be addressed in advance, such as how compensation can be determined fairly for family members who work in the business.

Questions To Ask Yourself: How will a transition impact the family, both family members involved in the business and those not involved? What should you communicate to both groups?

Learn To Let Go of the Reins

It might seem obvious, but a successful business transition is not possible if the current leader doesn’t step out of the way. Letting go of control often isn’t easy, but it’s necessary for the long-term health of the business. (Imagine if you were recruited to run a company, but then every decision you made was second-guessed or overruled. How long would you stick around?) Building out a transition plan, even a gradual one, can give you and your successor(s) time to get acclimated to this new stage in your business. It also allows for innovative ideas, for things to be done differently than you did them – and even for mistakes to be made.

Questions To Ask Yourself: What roles, tasks or relationships do you struggle most with letting go? Why is that? What can you do now so that you can empower others?

Ask for Help

Making the necessary decisions so you can create a thoughtful, documented and communicated plan is not easy, and adding in family dynamics only makes it more challenging. Bring in outside experts who can help you navigate the process. Attorneys, accountants, bankers, insurance advisors, wealth planners and family dynamics experts can all play a role. The key is to create a team which can guide you in both the financial and emotional aspects of transition planning. Given the firmly held patterns and processes that exist in most families, the use of a third-party facilitator will often lead to safer, richer and more open discussions.

Questions To Ask Yourself: What types of experts can best help your family create your business transition plan? What areas do you and your family need help with?

Document and Communicate Your Transition Plan

Once you determine your transition plan, document it – but understand that plans for a business transition remain in flux until the transition is complete. Things change both inside and outside the family, and any successful plan needs to adapt to that evolving landscape. Revisit your plan at least once a year and communicate your transition plan with your family at least that often. When it’s time to make the actual transition, you want there to be as few surprises as possible. Frequent, clear and transparent communication can be invaluable in setting expectations and meeting that goal.

Questions To Ask Yourself: How will you share your business plan regularly with your family? How will you create ongoing discussion in a way that engages everyone?

Charting a New Course

Once you have chartered the course for your business transition plan, the next step is to build it into your overall estate plans.

In many instances, the family business represents the largest portion of a business owner’s estate – which makes it paramount to craft a strategy that balances potential estate and income tax benefits with sufficient flexibility to address the family’s current needs. Often this balance can be accomplished by recapitalizing ownership into voting and non-voting interests and transferring a portion of the non-voting interests to an irrevocable trust. This strategy can provide several benefits to the business owner, such as:

  • The ability to manage the day-to-day operations of the business
  • A potential valuation discount of non-voting interests due to lack of marketability or control
  • The potential minimization of state income tax
  • Enhanced asset protection

Note that the business owner may still achieve some of the state income tax and asset protection benefits even if they choose not to recapitalize into voting and non-voting interests.

Having these important discussions about family business succession planning and then building them into a formal estate plan requires a combination of interpersonal and financial proficiencies. This is where the advice and expertise of someone who already understands your family’s dynamics and values can prove invaluable. Your Baird Financial Advisor can serve as a sounding board or facilitator for this important step in your business’s and family’s history.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.