Transitioning the Family-Owned Business to Successive Generations

Authored By: Ken Levy

Lifelong residents of Lodi know firsthand the value that multigenerational family-owned businesses and farms bring to our community.  When these enterprises are successfully passed to successive generations, wealth is created and retained, family members live in harmony with one another, local people are employed, discretionary income is spent at our stores and restaurants, the arts and charities are supported, and tax dollars fund schools along with vital public services.  In addition, the community retains a unique business that doesn’t exist anywhere else, adding to the distinctiveness of Lodi.  

However noble the goal of passing along the family business may be, the odds of such a business surviving for multiple generations are very low.  The fact is most family-owned businesses don’t survive into the second generation, and even fewer continue into the third and fourth generation.  When the transition of a family enterprise fails, the impact is felt far beyond the lost wealth and dreams of that particular family.  Jobs are lost, family relationships are strained, and the impact has repercussions across many sectors of the community.

In order for a family-owned enterprise to successfully transition to younger generations, it is vital that business succession is seen as a process rather than an event.  It can take years of planning.  To help families work through the process, what is needed is a team of advisors working together in their own respective areas of expertise such as entity formation, income taxes, gift and estate taxes, business financing, trust planning, among others.  To help families resolve differences and work through challenging issues, it is not unusual for family therapists or counselors to get involved.  A wealth advisor can be very beneficial in helping the family put together the right team and keeping the process on track.

Phase I: Understand.  Leaders see the truth for what it is, and it is time for the family patriarch to step up as the leader.  He or she must clearly understand the current business and family condition.  No longer should the family-owned business be thought of as an individual venture.  Instead, it should be thought of as a multigenerational family enterprise.  It begins with the family patriarch embracing the idea of a well-planned and structured transition of control and ownership to younger members of the family.  Questions to consider include: Is there a clear understanding of the existing business and estate documents, and the tax implications for succession in the event of disability or death? Have rules of entry into the business been established so family members don’t feel they have a birth-right to draw a paycheck?  Are the lines of communication open, and are all family members aware that the business succession planning process has begun? 

Phase II: Analyze.  Once there is a clear understanding of the state of affairs for the business and family, now it is time to analyze the alternatives for passing along the business.  Is there a family member who can step into the leadership role or should other alternatives be considered such as an asset sale, stock sale or an employee stock ownership plan?  If one or more family members inherit the business, will an attempt be made to equalize the estate through life insurance or gifts of other assets?  Financing, income tax, and gifting and estate taxes will all be critical factors in this analysis.

Phase III: Choose.  It is time to make a decision and move forward.  At this point, the advisory team will come together and lay out a timeline for coordinating each step along the way.  The plan will be formalized and presented to family members and other key members of the business.  Communication, at this point, is the key to keeping peace in the family.  Family members are often more receptive to the transition plan when it is presented by members of the advisory team rather than other family members.

Phase IV: Adjust.  Change is inevitable.  Over the years, there will be changes in the tax code, the economy, the industry and in the family dynamics. Revisions to your plan are bound to happen, and are necessary to make certain the succession plan is always appropriate. The advisory team and family members should meet on a periodic basis to review and revise the transition plan as needed.

_{Ken Levy is a financial advisor with, and securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.  Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  Investing involves risk including loss of principal.  There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not protect against market risk.  Alternative investments may not be suitable for all investors and should be consider as an investment for the risk capital portion of the investor’s portfolio. Contact: 2111 W. Kettleman Lane, Ste. C, Lodi, CA 95242 or 209-263-0330.}