How to Transition the Family Business to the Next Generation

November 22, 2021

Start planning sooner rather than later when it comes to family business succession planning. It often takes years to complete the process as the transition may need to occur in phases.

Succession planning for the next owners involves legal matters like buy-sell agreements, employee compensation plans and complementary personal estate plans. Succession planning for future leaders (even though they may not become future owners) involves training and business continuity strategies.

One often overlooked aspect is that of psychological and emotional ramifications. Some older family members suffer from anxiety over losing control of the business. While new, younger ownership may feel anxious about taking on these new roles and stress over more leadership requirements. Having a family counselor involved in the process may help the family discuss the transition more effectively and openly.

Another obstacle to family business transitions may be the scenario where the older generation cannot afford to gift the business to the next generation and the younger generation simultaneously cannot afford to buy the business. There are several creative options available to ensure a smooth transition.

- Leveraged Buy-Out: The younger generation borrows funds to purchase the business and makes payments on the loan using profits from the business.

- Installment Sale: The new owners make installment payments to the current owner rather than a lump sum purchase price.

- Charitable Bailout: The ownership interest is sold to a charitable trust instead of to the next generation of family members. The younger generation then purchases the interest from the trust.

- Sale to an Intentionally Defective Trust: Instead of selling the business directly to the next generation, all or a portion of it is sold to a trust and the next generation is the named beneficiary of the trust.

Succession planning is an opportunity to design how your business continues in your absence (either due to death, disability or retirement). During the process it is vital to understand and respect the family hierarchy, maintain a strong cash position, remain flexible and keep the lines of communication open.

The knowledgeable estate planning attorneys at Stouffer Legal can lead your family through the creation of a business succession plan that aligns everyone’s goals. You can schedule an appointment by calling us at (443) 470-3599, emailing us at office@stoufferlegal.com, or register for an upcoming free webinar using the link below:

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