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Schindel Segal Mendoza

Family Business Succession Planning: A Checklist Approach

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By: Kyle Moen

Kyle Moen
Kyle Moen

Transitioning ownership between generations of a family-owned business sometimes involves complex emotional issues that can be difficult for anyone to predict let alone control.  Transitioning ownership between generations of a family-owned business always involves complex legal and financial issues that, with enough forethought, are almost always within everyone’s control.  When planning for the transition of ownership to the next generation of a family-owned business, consider the following steps:


  1. Establish Goals: Businesses like to set and achieve goals.  Succession planning should be no different. Setting specific and measurable goals helps keep members of both generations engaged and feeling comfort that a plan is being developed. Goal setting also helps limit tension as the parties begin to negotiate the structure and terms of a deal.  For example, the future generation might have a goal of growing the business but needs access to cash or outside capital to make them a reality.  Meanwhile, the senior generation will have specific retirement goals including cash flow needs after exit and may not be able to afford to defer receiving the full value of their ownership.


  1. Develop an Operational Transition plan. For many family-owned businesses, the senior generation has led the company.  They are owners, operators, directors, officers, managers, and key decision makers.  In addition to identifying which members of the next generation will become owners, it is important to develop a plan for how they will become leaders.  Or if none of the younger generation is equipped to lead, how will the company find leaders from the outside?  Having a clear plan for transitioning operations of the company is as important as having a plan for transitioning ownership.


  1. Value the Business: Establishing a value for the business is important for several reasons.  It helps exiting owners understand what their asset is worth.  It also establishes value for tax purposes.  Importantly, it provides a baseline value which can help professional advisors determine what options are available for transferring ownership.  For example, in 2023 the annual gift tax exclusion is $17,000.  This means an owner can gift up to $17,000 of ownership (e.g. corporation stock or LLC interests) per person per year without impacting his/her lifetime estate tax exemption. Knowing whether the company is worth $170,000 or $170,000,000 can significantly impact how a deal is structured.


  1. Identify Options. There many ways to structure the succession of ownership within a family-owned business.  The company can issue new equity to the younger generation while redeeming current equity from the senior generation.  The senior generation can sell equity directly to the younger generation or sell the assets of the company rather than the equity. Also, the purchase price for ownership can be paid in a lump sum, or financed by the senior generation with payments over time.  Or the senior generation can gift equity to the younger generation.
    Structuring the transaction also requires considering whether and to what extent the senior generation will remain involved after closing.  For example, if the younger generation is financing their buy-in on a promissory note, the senior generation may feel vulnerable to poor decision making and request to retain a board seat (or other decision-making power) until the note is fully satisfied.  They may also want to dictate things like compensation to the younger generation, capital investments, and other important financial decisions until their note is paid.


  1. Analyze Tax Implications. Whether gifting or selling, transitioning ownership has tax implications.  Once the company’s value is determined, a qualified CPA should be consulted to perform a tax analysis of the various options for transitioning ownership.


  1. Finalize the Plan. Having a written succession plan that addresses how and when the transition will take place, gives all parties a common goal.  Once the hard work is completed in determining deal structure, tax implications, transition of operations, timeline, and a myriad of other issues and to do items, the work of documenting the final plan should be easy.  But this is an important step to ensuring everyone – from the parties to the professional advisors – is aligned in their expectations for the deal


  1. Draft / Update Legal Documents. Finally, with a plan in place it is time to prepare the necessary legal documents – purchase agreements, redemption agreements, bills of sale, promissory notes.  The documents required will be determined by the structure of the deal, but serve as the foundation of the parties’ legal arrangements and cannot be overlooked.  Also, to the extent that ownership transfers over multiple years, the parties will also need to consider updating existing corporate documents, including buy-sell agreements.  It is important to consider what happens upon the death or disability of an owner, particularly if something unexpected occurred while the younger generation was still in the process of buying out the senior generation.

There is no formula to family-business succession planning, but following these simple steps can provide a good framework for developing and executing your plan.

Kyle Moen is a partner at Schindel Segal Mendoza, PLLC, where he advises clients in purchase and sale transactions and represents private companies as outside general counsel. 

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