Five Tips On Passing The Torch Family Businesses

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Clearing the path for a successful business ownership transitions, especially between family members, can be a tricky proposition from a financial point of view.

According to a recent white paper from Abbot Downing titled “Preparing for Family Business Transitions,” most families accumulate wealth through the ownership of family businesses.



Specifically, 65 percent of American households with at least $25 million in assets include a private business owner.

Yet private business owners are aging, the study reports. Roughly 60 percent of all U.S. private business owners are over 55 and about 33 percent are 65 years old or older.

Consequently, aging private business owners should look beyond determining whether it is prudent to plan for an orderly business ownership transition and, instead, focus their time and energy on managing the ownership transition in an effective, financially savvy manner.

While there are key areas of interest to cover in family business succession planning (starting transition planning early, solid communications, and articulating a crystal-clear vision), focusing on the financial aspects of ownership transfer is a critical component in private business ownership transitions.

Here are five key steps:

No. 1: Have a transition business plan

To properly transfer business ownership to family members, ensure that the business plan includes understanding where the company currently stands, financially (especially its value) and operationally, and the capital operations needs required going forward.

Time-wise, put a clock on the evolution of a family business transition plan. Five years from conception to successful implementation is a good target goal – that will leave family business transition planning participants ample time to structure the macro-side of the transition (financial planning, benchmark timelines, and getting employees and stakeholders on board) along with the micro-side of the transition (budgeting for the transition process, dealing with stockholders and board of directors, and evaluating any potential name change under the new ownership.)


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No. 2: Consider a board of directors

Families looking for a smooth transition plan need all the good advice they can get. If your family business doesn’t have a board of directors stocked with experienced, savvy business professionals, consider creating one now before you get too far down the road on a family business transition plan.

Ideally, you’d want a good business and estate lawyer on hand as well as a trusted accountant and financial planner. If your company doesn’t possess adequate funds for a full board of directors, consider creating a more informal board of advisers that includes trusted businesses and family members to help you navigate a good succession plan for business.

No. 3: Prepare the correct documents

When transferring business ownership to a family member, you’ll need to have several critical documents on hand. First, consider establishing a “family pact” that lays out the ground rules on key transferal issues such as:

  •  Limits for incoming family members looking to transfer shares of company stock.
  •  Conditions for any business name change and major changes at the executive level.
  •  Guidelines for family business member salary compensations, promotions, and business titles.

It’s also a good idea to create a will that lays out the operational framework in the event of a key family executive passing away or leaving the company for a new job or career.

No. 4: Know how you’ll hand over the business

Every family business transition planning scenario is unique, which is why you need all the help you can get in deciding how you wish to hand over the company to a family member. Options include giving the company outright to a family member, selling it to family members, or a combination of the first two options.

You want to ensure when you walk away from the process that the family business legacy remains intact, cash flow isn’t negatively impacted, and your employees are taken care of. Again, talking to a respected financial planner, accountant and/or estate lawyer is highly advised – they can steer you to the family business transition planning financial model that works best for you and your family.

No. 5: Learn from your business peers

Talk to business and family contacts who have dealt with their own family business transition planning. Ask what worked and what did not.

For example, did the current family business owner leave a nest egg for the next-generation owner? Or, did they schedule regular meetings with family members to discuss critical company business and financial matters? Did those meetings include a trusted financial adviser or accountant? Ask around, have meetings, and stay engaged with peers who have traveled the same business succession plan path that you’re traveling.

There’s much at risk when deciding to walk away from a family business. Cover all the bases and get the job done right using the tips listed above because transferring business ownership to a family member the right way is critical for you and your family business.

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Brian O’Connell is a former Wall Street bond trader and the author of two best-selling books, “The 401k Millionaire” and “CNBC’s Creating Wealth.” O’Connell, who has 20 years of experience covering business news and trends, believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes.

The content provided is for informational purposes only. Neither BBVA Compass nor any of its affiliates is providing tax, legal or accounting advice. You should consult with your own tax, legal or accounting professionals for advice about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA Compass or any of its affiliates.

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