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Steven J. Clausen
Caldwell East & Finlayson PLLC
San Antonio, Texas

An inevitable issue facing every family business is succession – who will replace the current owners and officers of the business once they retire or die?  This may be the thorniest issue of all in the transferring of a family business from one generation to another, and prior planning (or the lack thereof) can make the difference between success or failure for the continued viability of the entire family business.  Ultimately, the owner of a family business has four choices regarding the disposition of his or her business: (1) sell, (2) give away during life, (3) transfer at death, or (4) liquidate.  Proper succession planning allows the business owner to determine which option works best for owner, family and business, rather than leaving it to chance and the hope that those left behind will figure it out.

Why do we care if family businesses are successfully transferred from one generation to another?  Family businesses are extremely important to our economy. Family dominated businesses comprise more that 80% of the business enterprises in the United States, and account for more than two-thirds of the nation’s jobs and over 50% of its Gross National Product. Given this prevalence in society, the importance of successfully transferring ownership and operation of such family businesses, through estate planning and succession planning becomes apparent.


There is no clear definition of a “family business”, although it is often referred to as a “closely-held business”, and there may not even be any family members involved in the operation of the business.  A family business includes (a) two unrelated people who have formed a closely held business, (b) a husband and wife, (c) a parent and child or children, (d) siblings who are in business together, or (e) some other combination of the foregoing.  However, do not equate the term family business with “small business”.  In one recent survey, the median annual revenues for family-owned businesses were $9 million, while at the high end of the scale there were family businesses that reported annual revenues in excess of $1 billion.


Estate planning involves much more than “making a will” or “creating a trust”.  It encompasses planning for the accumulation, preservation, and transfer of wealth from an individual to his or her intended beneficiaries according to that individual’s intentions and objectives, Estate planning, or more specifically, “wealth transfer planning”, necessarily then, includes both lifetime as well as “death time” planning.


Succession planning is only one part of wealth transfer planning.  It involves planning for the preservation and transfer of control and control of an individual’s business in a manner that carries out his or her objectives.  It is generally designed to insure the viability of the business from one generation to another.  As is discussed a little later, succession planning can present the business owner with both family and business problems so difficult to deal with, it is much easier to keep everyone “happier” by doing nothing, which leaves one in control and in the position the business owner is most comfortable with.


Very few family businesses survive into the third generation.  Statistics in one study show that only 30% of family businesses survive for more than one generation (i.e., from parent to child), only 15% of family businesses last for two generations (i.e., from grandparent to grandchild), and only 1% of family businesses survive for three or more generations.


The leading causes for why so many family businesses fail are:

(a)                Unresolved family discord and indifference;

(b)               Bad management, including lack of leadership, lack of management depth, and training;

(c)                Lack of, or inadequate, business succession and wealth transfer planning;

(d)               High taxes (death and income taxes); and

(e)                Unforeseen catastrophes and problems (e.g. environmental liability, natural disasters, labor strife, etc.).

The problems associated with high taxes, bad management, family discord, and indifference can be controlled, and even eliminated, through a well thought out business succession and wealth transfer plan.


Several of the reasons for the failure of family businesses are laden with emotion, which ultimately, and unfortunately, prevent many business owners from implementing the comprehensive business succession plan they need.  Family business attitudes toward succession plans mirror individual attitudes about wills.  Although the mechanics and formalities of a business succession plan are fairly straightforward, the advantages obvious, and the expense small in comparison to the benefits, a surprisingly small number of those who would benefit from succession planning address the issue in a meaningful way.  Only about 25% of family businesses have formal succession plans, even though the goal of most family business owners is to transfer the business to another generation.

One reason for avoiding wills and succession plans is that nobody wants to think about the death of a family member (or one’s self).  Children frequently do not want to bring up the subject because they are uncomfortable with the topic of a parent’s death, or they do not want to appear greedy.  Spouses, too, are reluctant to broach the topic.  The owner may have an additional reason – the expressed or unexpressed need to avoid making two difficult decisions:  “When is it time to go?” and “Who should take my place?”  Most business owners have strong personalities and enjoy being in control.  They are likely to perceive succession planning as a threat to their control.  Typically, it is the family business that expects a transition to occur in the next few years which has a formal succession plan.  When a founder’s retirement is more than ten years away, it is rare to find a business with a formal succession plan in place.

Succession issues also have the potential to wreak havoc, both in the business and in the family.  Starting down the succession path can open “old wounds” involving various family members that have been swept under the rug.  Many successful business owners have fractured relationships with their family because of all the effort and time it has taken to make the business successful.  Individuals in the business may start jockeying for position if they sense a changing of the guard. Employees can become more concerned about what is going to happen to them if a change in the business is made than doing their jobs.  The business can be severally disrupted in this process.

Decisions about selling or keeping the family business or selecting one family member over another to take over leadership can be explosive ones.  Oftentimes, the spouse of the business owner has to be a referee between the business owner and their children as new roles are being discussed.  Children not involved in the business may see this process as “short changing” them.  Family members may have irreconcilable needs and expectations.  For example, if two children in a family want to accept an offer to purchase the business, but two others do not want to sell, a compromise may be impossible.  Such conflicts may also reignite old resentments and jealousies among family members.  Given this potential for family conflict, it is not surprising that many business owners and their families fail to address succession planning issues honestly.  Sometimes, the conflicts are so great a behavioral expert is needed as part of the planning team.

Although we might assume that postponing succession planning as long as possible will at least confine the length of time the issue is a problem, avoidance can actually magnify the problem.  When succession issues are left unresolved, family members will develop their own sense of expectations.  For example, the youngest child may leave a family business thinking that he or she will be passed over, when in fact; the parents have the opposite plans.  In another scenario, the child who was the founder’s “favorite” may mistakenly think he or she will be the chosen successor.  Worse still, and is often the case, the business owner may die before announcing any decision, leaving the family business in chaos with no one in charge.


  • Succession planning is a significant part of wealth transfer planning for every family business and the business owner owes it to family members and the business family who depend on the success of the family business for their livelihoods to complete the task;
  • Failure to develop a formal succession plan will impair the family’s financial well-being and personal relationships—often pitting the survivors against each other;
  • Without carefully coordinated succession and wealth transfer planning much of the family’s wealth may go to pay death taxes, which can threaten the survival of the business and the family’s financial situation ; and
  • Often times, independent, impartial, unbiased, outside advisors are necessary to help the business owner effectively solve the succession problems because the existing advisors do not want to “rock the boat”.


Successful business owners are busy people who often focus on the short-range rather than long-range goals.  Most business owners engage in wealth transfer planning and succession planning only after they learn the tax consequences of various actions or inactions or someone is “forcing” the business owner to engage in the process.  Even then, it may feel like a juggling act to the family business owner, as he or she tries to balance concerns such as retirement income, family harmony, being fair and equitable to all the children, taxes, transferring ownership, and fears that the successor will not be able to handle the responsibilities, while at the same time still running his or her business.

An excellent family business advisor provides a valuable service to the family by initiating the succession planning process and keeping the owner focused on the goal of preparing and implementing a formal business succession plan.  To keep the owner focused and motivated to implement a succession plan, a business advisor must find the business owner’s “hot button”.  What is important enough to the business owner for him or her to go through the traumatic process of “firing” himself or herself and letting someone else have control of the owner’s most prize possession?  Unless that motivation can be discovered, there is little chance an effective succession plan will be implemented.  Coupled with finding the “hot button”, it is imperative that the owner’s retirement lifestyle is not totally dependent on the successful operation of the family business by the successor.  If that is the plan that ends up being developed, there is little chance that the owner is going to risk retirement lifestyle or the surviving spouse’s lifestyle on implementing such a plan.  The risk is too great.


To formulate and implement a business succession plan, the business owner needs to resolve four distinct questions:

  • Should the business be sold or kept under family control?
  • If the business is to be sold, who are the potential buyers and when should it be sold?
  • If the business is kept in the family, who should have ownership and ultimate control?
  • If the business is kept in the family, who should be in charge of day-to-day operations?

Although these questions appear interrelated, they really raise distinct issues, each of which must be fully addressed in a logical way.


What can a family business owner do to make the transfer of his or her business successful?

  1. Develop a clear retirement career plan for the business owner and the owner’s spouse.

Define their roles and involvements inside and outside the business and address his or her financial requirements.  Does the business owner have financial resources independent of the business, or is retirement dependent on the successful operation of the business?  The answers may dictate the owner’s need and desire to stay involved with the day-to-day operations of the business.  It is extremely important that the owner’s retirement assets include asset classes unrelated to the company.  Life insurance provides a very attractive way to provide for the surviving spouse and eliminate the potential friction that can exist if her lifestyle depends on income coming out of the business.

Many family business owners say, “I’ll never retire!”  If the owner is granted a long, healthy life, retirement may mean that he or she will need to channel their energy into other meaningful activities.  This may not come easily, especially if the business owner has never developed other fulfilling interests.  However, procrastination about considering this issue prevents the succession planning process from moving forward.  The effect on the day to day activities of the spouse not involved in the business must be addressed when the “boss” does not need to be down at the business anymore?

Why do it?  The greatest challenge, next to building a successful business, is transferring it.  To make the transition, a business owner must see what he or she is going toward, not just what he or she is leaving behind.  Succession planning can be a rich opportunity for the family business owner – it offers a way to perpetuate the special opportunities of ownership for new generations and to create a lasting institution that will reflect the family’s ideals and goals long after the owner is gone

2. Develop a realistic and shared written vision for the future of the business to guide the business when the business owner is no longer actively involved and in charge.

This vision will include where the owner wants the business to go, what kind of business it will be ten or more years from now, and a picture in words that will inspire and motivate future owners, managers, and employees alike.

3. Select and train the successor.

The owner needs to establish and communicate the selection criteria for his successor beforehand.  When the time is right, the owner will select a successor, keeping in mind that the successor may not necessarily be one of his children.  Do not expect the owner’s children to be able to do things they have never done or have no interest in doing.  With the owner’s chosen successor, create a plan for him or her to gain the necessary skills, experience and abilities to step into the owner’s shoes.  This means giving the chosen successor more than just a title.  Family business owners are good at what they do, but typically not at training someone else to do it.  Find good training resources inside and outside the company and use them.

Why do it?  By training and developing the owner’s successor, the owner is preparing him or her to take the controls of the plane and ensuring that it will not crash.  Successors do best when expectations are clear, accountability is strong, and training resources are available.

4. Develop a process for transferring authority and power in the business.

An owner has and enjoys a certain amount of authority and power.  Employees, advisors, customers, and suppliers must gradually shift their loyalty to the owner’s successor.  Especially for long-term employees and customers this can be tough.  The owner plays a huge part in making this shift happen or not happen.

Why do it?  The transfer of authority avoids confusion about who is in charge.  It is important to minimize intentional and inadvertent undermining of the successor’s developing authority.  It also helps the successor deal with the fact that loyalty and respect are earned, not demanded.

5. Develop a wealth transfer plan that specifies how family assets and ownership of the business will be protected and distributed.

A wealth transfer plan spells out how the owner’s assets will be protected and distributed to heirs.  Two common concerns are minimization of death taxes and treating children fairly (which is not necessarily equally).  Before selecting a particular wealth transfer method or technique, decide what objectives you want to accomplish and the relative weight each should be given in your wealth transfer plan.

Why do it?  Because Uncle Sam can take close to 55% of all the owner has worked hard for, the owner’s family could lose the business, the owner’s children may never speak to each other again, and the owner does not want his children’s last thought of their parent to be “Why didn’t Dad/Mom plan to prevent this?”

6. Design the business continuity plan including management structures, family council, and board of directors.

A business continuity plan addresses where the business is going and how it will get there.  It should include key business strategies; the kind of leadership, management, and operational structures needed; and roles, responsibilities, and accountability of next generation family owners/managers.  The latter is especially critical when children are faced with becoming business owners.

Why do it?  The long-term needs of the business are often ignored due to the juggling of competing interests.  Business succession planning addresses the future needs of the business to enable it to be successful after the owner is no longer in control.

7. Design a family participation plan that specifies understandings and rules for future family involvement in the business.

A family participation plan helps preserve family harmony.  How will family members be employed, compensated, and supervised?  How will family values shape the business?  What expectations can family members have of the business and vice versa?

Why do it?  Because the quest for wealth and power can contaminate even the best family relationships, and lack of clear expectations leads to everyone making up their own rules.  When everyone knows the game plan up-front, winning the game later on is much easier.


Remember that succession planning is a process, not an event, and it is more than just simple estate or retirement planning – its part of a comprehensive wealth transfer plan.  It is the blueprint that guides the owner and family in successfully dealing with each important facet of perpetuating the family business.  It includes strategic planning, retirement planning, management planning, equity ownership planning, family participation planning, corporate governance, liquidity planning, and tax planning  Succession planning, when done properly, takes time, takes money,  involves the family, and follows a step-by-step process where business and family issues are addressed.  In this way, the business owner builds a firm foundation both assuring the future success of the business and promoting harmony within the family.