The importance of a family business succession plan

SYRACUSE — Succession planning in a family business could take several years with plenty of factors to consider on the emotion and economics of the leadership change.

That’s according to Anthony (Tony) Marshall, an attorney in the Syracuse office of law firm Harris Beach, PLLC. Harris Beach is headquartered in Rochester. 

Marshall spoke with CNYBJ on April 17.

His practice focuses on corporate tax and trust and estate areas. Most of his clients are closely held, family businesses in upstate New York. Marshall is also licensed as a certified public accountant, he says.

A family business can’t wait until the owners provide an eight-month notice of their intention to retire to determine the next-generation leadership and direction the company will pursue, says Marshall.

The business owners need to think “through the succession-plan process, who’s going to take over what role [in company leadership],” he adds.

If the company doesn’t have family members who are in line to take over the leadership role, the owner will either target other “key employees” or work to sell the business.

“That’s going to be your exit strategy … but the bottom line is we need an exit strategy,” says Marshall.

Develop a plan

A family business needs to develop a plan that allows the shareholders who want to retire to leave the company. The plan should also enable the family members or key employees with the “core competencies” to assume the leadership role.

Any succession plan should also align the needs of both the outgoing owners and the incoming leaders, says Marshall.

The departing shareholders will want to realize the value of their stock for retirement income and preserve the business so it can remain profitable and grow, he adds.

The new company leaders will have to determine if they’ll need additional compensation for a more leadership-specific role, while also understanding that the business may need to continue providing payments to the retiring shareholders for a while. 

“So is there enough cash flow that’s going to align everybody’s needs and wants, and make sure that the company doesn’t go bankrupt in the process,” says Marshall.

The process doesn’t happen “overnight,” he notes.

Start talking

A typical family business should have a strategy to “just start talking about it” when the primary business owner reaches the age of about 50, says Marshall. 

Sometimes a family’s children won’t want to assume control of the business, and sometimes they want be the next generation of ownership. For those interested in leading the business, the parents have to determine if the children have the necessary “core competencies.”

“What skill set do they need,” Marshall says, referring to a company’s need for operations, administration, and back-office functions.

The decisions become even more important if a family has multiple children in line for leadership roles, he says.

“Ultimately, part of that strategy would be … having whom you feel is going to run the organization have the controlling vote,” says Marshall.

The owners also have to determine how to handle the company’s shares, including whether to gift them or to sell them and whether to structure the stock into voting and non-voting shares, he adds.

If a family has three siblings in line for consideration, who will get the controlling shares and when do the parents or owners provide the shares?

“What do Mom and Dad want? What kids want to be involved? You start early enough, the economics can be worked out. The skill sets can be addressed,” says Marshall. 

The thought process on succession planning can last as long as 15 years, Marshall notes.

A family business will want the benefit of hind sight “as much as possible,” which means it should start early and allow the process to evolve. 

If they don’t start early enough and express to children or key employees that an ownership opportunity is available, then the family owners could start feeling pressure. 

At that point, the effort for a succession plan “tends to fail,” Marshall says, leading to the eventual sale of the business.

SYRACUSE — Succession planning in a family business could take several years with plenty of factors to consider on the emotion and economics of the leadership change.

That’s according to Anthony (Tony) Marshall, an attorney in the Syracuse office of law firm Harris Beach, PLLC. Harris Beach is headquartered in Rochester. 

Marshall spoke with CNYBJ on April 17.

His practice focuses on corporate tax and trust and estate areas. Most of his clients are closely held, family businesses in upstate New York. Marshall is also licensed as a certified public accountant, he says.

A family business can’t wait until the owners provide an eight-month notice of their intention to retire to determine the next-generation leadership and direction the company will pursue, says Marshall.

The business owners need to think “through the succession-plan process, who’s going to take over what role [in company leadership],” he adds.

If the company doesn’t have family members who are in line to take over the leadership role, the owner will either target other “key employees” or work to sell the business.

“That’s going to be your exit strategy … but the bottom line is we need an exit strategy,” says Marshall.

Develop a plan

A family business needs to develop a plan that allows the shareholders who want to retire to leave the company. The plan should also enable the family members or key employees with the “core competencies” to assume the leadership role.

Any succession plan should also align the needs of both the outgoing owners and the incoming leaders, says Marshall.

The departing shareholders will want to realize the value of their stock for retirement income and preserve the business so it can remain profitable and grow, he adds.

The new company leaders will have to determine if they’ll need additional compensation for a more leadership-specific role, while also understanding that the business may need to continue providing payments to the retiring shareholders for a while. 

“So is there enough cash flow that’s going to align everybody’s needs and wants, and make sure that the company doesn’t go bankrupt in the process,” says Marshall.

The process doesn’t happen “overnight,” he notes.

Start talking

A typical family business should have a strategy to “just start talking about it” when the primary business owner reaches the age of about 50, says Marshall. 

Sometimes a family’s children won’t want to assume control of the business, and sometimes they want be the next generation of ownership. For those interested in leading the business, the parents have to determine if the children have the necessary “core competencies.”

“What skill set do they need,” Marshall says, referring to a company’s need for operations, administration, and back-office functions.

The decisions become even more important if a family has multiple children in line for leadership roles, he says.

“Ultimately, part of that strategy would be … having whom you feel is going to run the organization have the controlling vote,” says Marshall.

The owners also have to determine how to handle the company’s shares, including whether to gift them or to sell them and whether to structure the stock into voting and non-voting shares, he adds.

If a family has three siblings in line for consideration, who will get the controlling shares and when do the parents or owners provide the shares?

“What do Mom and Dad want? What kids want to be involved? You start early enough, the economics can be worked out. The skill sets can be addressed,” says Marshall. 

The thought process on succession planning can last as long as 15 years, Marshall notes.

A family business will want the benefit of hind sight “as much as possible,” which means it should start early and allow the process to evolve. 

If they don’t start early enough and express to children or key employees that an ownership opportunity is available, then the family owners could start feeling pressure. 

At that point, the effort for a succession plan “tends to fail,” Marshall says, leading to the eventual sale of the business.