Succession planning

Business succession planning is an important, yet difficult, objective for closely held business owners and family business owners to achieve. These businesses make up an important part of our economy, yet less than 50 percent of business successions survive beyond the first generation owner(s), and less than 25 percent survive the second-generation transfer.

The reasons for this vary, but in many cases inadequate business and estate planning, and poor training and transition planning, are the primary culprits. Failure to recognize and plan for the psychological and emotional aspects of succession planning also contributes to this failure rate.

There are many questions that need to be asked and answered before a succession plan can be developed. Important factors to take into account before attempting to develop the succession plan include the following.

  • The business founder may be emotionally tied to the business, and reluctant to get family members involved, transition or diversify management responsibilities, or commence the appropriate training early enough in the process.

  • Each family member may have a different view or opinion of the business and how it should be run, depending on whether he/she is actively involved in the business or merely a passive owner expecting to benefit from distributions of profits.

  • The business itself may represent a large portion of the family’s wealth.

  • The customers of the business may be more loyal to the current owner(s) than to the business itself.

Most business owners share an emotional and psychological identity with their business; it is part of them and they of it. Business succession planning involves or affects the entire family, requires open and direct communication and is impacted by plenty of emotion.

The transfer of ownership, management and even the mission statement or philosophy of the business to individuals who are qualified, experienced and capable is critical to the future success of the business. Not all family members are qualified or ready to succeed the founding family member, and discussing and recognizing this can be the biggest barrier to a well-conceived plan.

Conflicts among family members, those who are involved and work in the business, and those not involved but who hold an ownership interest and enjoy the profits of the business, will inevitably arise. A good business-succession plan will not only anticipate this, but will also develop a strategy and procedure for how these conflicts will be resolved.

A business owner must be willing to identify and discuss the needs of the business and the qualifications of their family members, and each family member’s potential role in the succession plan. A well-conceived succession plan will establish the qualifications for family members becoming involved in the business, as well as the standards by which they will be evaluated.

The plan will also establish criteria for compensating family members, rules for electing officers and directors, and may even provide for outside directors.

From an estate-planning perspective, closely held and family businesses are typically very illiquid, and a partial interest in the business may be difficult to value. This can create issues if estate taxes are owed at the owner’s death, or if a family member has a right to sell their stock to the other family members or to the business itself for redemption.

Regular communication among all family members who have an interest in the business, whether active or merely as an owner, and a review of the established policies and performance of the business are important elements for continuing a successful transition.

Kevin Bernys is a member in the Bloomfield Hills office of Dickinson Wright, where he practices in the areas of estate planning & trusts, corporate, taxation, employee benefits and mergers & acquisitions. For additional information, please visit