Succession Planning for Your Family Business

Owners of small- and mid-sized privately held businesses in the U.S. are looking to hit the golf course, ride the waves, scale a summit, or simply relax with a cold drink and watch the setting sun. Business successions — planned or otherwise — are on the rise. One-third of manufacturing executives anticipate a planned leadership succession in the next five years, and succession is possible at another 28 percent of companies.

Why? A combination of demographic and economic trends:


Macroeconomics and industry trends might pique the interest of owners in selling. But every succession is ultimately a personal business decision.

Some executives reluctantly slouch toward retirement, driven by health conditions or age that makes it impossible to continue. Others weigh their stay-or-go options based on personal wealth and their ability to monetize a lifelong investment of sweat and cash. Yet even when all signs say “go,” company considerations often keep leaders tied to their desks, especially if they want to protect the interests of other stakeholders (e.g. employees). What if there’s no obvious successor or interested buyer?

The first step in business succession planning is to identify the objectives of your own passage. These options usually fall within three types:


For some executives, years of hard work merit an untethered exit from the companies they've led. Health conditions also may demand this approach. A clean break can mean selling the company to a third party (executives within the company or external investors), dissolving the company (i.e., liquidating its assets), or transferring ownership (such as to a family member).

While the objective of this approach seems clear (no leadership role going forward), it can get muddy when a current executive or family member assumes control. They may want or need advice; you may want or feel that you need to provide advice, whether welcome or not. It’s best all around to make sure that both you and the new leaders formally recognize your clean exit via a contract.

The clean break may also represent a loss of regular income from the company (with some exceptions, including pensions or continued minority ownership). Smart business succession planning includes detailed pro formas of personal income compared to projected lifespan, incorporating all assets (savings, retirement funds, other earning potential, etc.). Run the numbers for optimistic and pessimistic projections, including appropriate risk profiles for various investments.

A core component of this financial assessment will be tax considerations applicable to the exit (e.g., outright sale, gradual sale, transfer of ownership). The nature of the exit will significantly impact estate taxes, capital gains, etc. For example, if succession can take place over five to 10 years, a gradual transfer of shares to family members as gifts can reduce taxes at time of sale.

And similar to any M&A activity, a thorough business valuation is vital as a baseline from which to project anticipated income from a sale or transfer, as well as associated tax liabilities.


Maintaining an active role in the company you once owned can range from retaining leadership to being an ad-hoc advisor. This is an attractive option when there’s a need to mentor a successor, and can gradually wind down an owner’s involvement. This is often a required condition when an outright sale is involved, especially if key intellectual property or customer relationships reside with the owner.

Keeping one foot in the door differs dramatically from running the company solo. Expect to lose something in the way of authority, like it or not. This is expected when selling a company. But in transferring ownership to family members or fellow executives, the boundaries often get fuzzy. In successful transitions, all parties clearly define their new roles in advance and communicate those changes to all stakeholders.


No owner can live forever. A forward-looking strategy for leaving the company (i.e., a soft exit) offers an opportunity for a successful transition that leaves the owner and company in good shape for years to come. It can build a bridge from today to tomorrow, yet doesn't impose immediate changes on an owner’s role or earnings.

With a soft exit, owners retain a significant ownership position as well as many (or all) of their current leadership responsibilities. Unlike other strategies, this exit can actually add to their duties: the owner will be engaged in developing an M&A strategy and/or finding, mentoring, and coaching a successor.

The soft exit enables an owner to get his own financial situation in order, plan for a clean exit, and organize the future of the company. But even a modestly reduced leadership role can be difficult for some individuals to accept. Craig E. Aronoff, author of Letting Go: Preparing Yourself to Relinquish Control of the Family Business, writes: “The single most important factor in the successful transition of a family business to the next generation is the attitude of the person who is sitting in the CEO’s chair.”


The most important thing is to START planning. Don't put it off until you are forced into a less than ideal situation. We've assisted numerous clients with their business succession plans and valuations. Give us a call today or fill in the contact form below and we'll be in touch.


Douglas Osthimer, CPA, CVA, CGMA
Phone: 574.289.4011, x223


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