Handing Down the Family Business

Like many business owners, you may dream of passing your family business down to the next generation. And yet you know the statistics aren’t good – most businesses don’t survive the transition from the founder.

We’ve found you can improve the odds of a successful transition by following some key steps. You don’t have to put your life on hold or shut the factory down for thirty days – just a few small steps, consistently taken over time, can make a big difference.

Over the next few posts we’re going to be talking about these steps as a sneak peek of our new book coming out later this year. There are so many tools and techniques and concepts out there (each with its own acronym – ESOP, EBITDA, APA) that it’s easy to get lost in the weeds and forget what you’re trying to accomplish in the first place.

So before we head to Acronym City, let’s look at what we’re after – a successful transition (sounds better than the alternative, doesn’t it?).

What is a Successful Transition?

By successful, we mean a transition that meets the following criteria:

  • Value loss is minimized.
  • Family harmony is maximized.

Keeping the Value in the Business

You’ve spent years building your business; you don’t want half the value to go out the door because you’re no longer around. Value can evaporate with the loss of key relationships/customers; loss of expertise; taxes; and business running to a competitor. Key questions: if something were to happen to you today, is there someone who knows what you know who can immediately put that knowledge to use? Or is it all (tapping your forehead) up here?

Maximizing Family Harmony

A family business should be a source of pride, not a burden. It’s a place where the people you choose can make fresh decisions to respond to the current market while acknowledging the legacy of those who’ve come before.

Every business has its challenges. But, you want to make sure that your chosen successor is willing to face those challenges on a daily basis, not shudder at the burden of it all. In other words, is this how she wishes to spend her life?

So, there’s a couple of takeaways – first, you want to make sure that your chosen successor is qualified. And the most important qualification is interest in the job. Impart as much wisdom as you can, let her take as many risks as she can so she can get the experience she needs. Wisdom + enthusiasm = power formula for success.

Second, the successor needs to know that not every decision is going to be challenged by her brother (or brother-in-law). As you know, running a business means making tough calls. You want to make sure your successor has the power she needs to make things happen without the constant sniping of others. This means designating someone to be in charge.

It also likely means that the one in charge is going to need to be the owner. We’ve found (and you’ve probably seen) that one of the biggest challenges in a second-generation business is when those who are running the business (insiders) share ownership with those who work outside the business (outsiders). Wherever possible, don’t split the ownership between insiders and outsiders – it just creates bad blood for everyone involved. The insiders feel like they’re doing all the work, the outsiders feel like the insiders get all the perks. No one is happy. Centralize control and ownership.

You have every right to make your decision in private. But, once you’ve reached a decision, don’t keep it to yourself. Let your family know your intentions so they’re not finding out when the will is read. Better to have some tough conversations now so that people know where they stand.

As you go through this analysis, you may find that for your situation, the best transition is actually a sale of the business rather than handing the reins down to the next generation. Next time, we’ll look at the process of selling a business before returning to recommended steps for your successful transition.

Some suggested resources:

If you’re wondering how you can transfer what you know and do to something more widely shared and transferable, check out Michael Gerber’s book, The E-Myth Revisited.

For thoughts on choosing and training your successor and easing the travails of transition, look at Marshall Goldsmith’s book, Succession: Are You Ready?

Three Easy Ways to Screw Up Your Estate Plan

No. 1 – Your Beneficiary Designations don’t Match your Will

Wills are powerful things, but they don’t dispose of everything. Think about if you have life insurance – you probably filled out a beneficiary designation years ago. If something happens to you, the life insurance company is going to send the death benefit to that beneficiary, regardless of what you say in your will.

So, if you’re a parent and you don’t want to leave too much to a child before they’re able to handle it, you might put a trust in your will saying that your estate will be managed for the child’s benefit until they can handle it. But, if the designation on file with the life insurance company says give it to the kid, that’s what the company is going to do.

These days, more and more of our wealth looks like the life insurance. You may own your house jointly with right of survivorship, have a lot of money in a joint checking account, or have named a beneficiary to a retirement or stock account. For these, the survivor may take all regardless of what your will says.

You’d be surprised how many folks who are divorced still have life insurance or a retirement plan naming the ex as the beneficiary. NOT what most want.

No. 2 – You Choose the Wrong Person to Handle Everything

Your plan is only as good as the people you put in charge. It’s so important to choose the right person or institution. You give them too much power not to. If they abuse it, most of your estate can disappear. Instead of enjoying a lasting legacy, your loved ones will be trying to decide whether it’s worth it to go after the person who abused your trust.

No. 3 – You Fail to Plan

Everyone has an estate plan. For most folks, it’s that they don’t plan to die. We all know you don’t get to choose the day and hour. Things happen unexpectedly. Better to go on and make some decisions now to avoid the additional expense and uncertainty for your loved ones.

Do I Need a Revocable Trust?

The quick answer is…that depends. A revocable trust can be a vital part of an estate plan. In some states, revocable trusts are the norm. In others, not so much. Some promoters hype the revocable trust as a cure-all for everything from corns to cancer. The reality may not live up to the hype.

What is a Revocable Trust?

A revocable trust is an agreement you have with yourself. You sign both as the person creating the trust and as trustee. The agreement contemplates you’ll contribute property to the trust, which you’ll continue to manage as long as you’re alive and able. If you pass away, then a successor trustee that you’ve chosen steps in to manage your property. He, she or it will continue to hold your property or transfer it to your loved ones depending on how you have it set up. Same if you become incompetent – if you’re no longer able to manage your affairs, your chosen trustee can step in without having to go to court to declare you incompetent. Incompetency proceedings can be nasty affairs, and the revocable trust may help your loved ones avoid that.

It’s revocable in that you can change it, throw it away or get any property at all out of it as long as you’re alive and competent. So, you’re not locked in 20 years from now or even 2 days from now if you want to make a change.

Why Use a Revocable Trust?

There can be a lot of reasons why you’d want a revocable trust. In some states, probate (the process of going to court and getting your will confirmed after your death) can be time consuming and expensive. A revocable trust may help your loved ones avoid some of that.

Another reason is privacy – the terms of the trust aren’t filed with a court. Once you’re gone and the will is filed with the court, it can be obtained by anyone who wants to see it.

A third reason is avoiding a will contest – if you’re concerned that someone would want to challenge your will, the revocable trust could be an additional line of defense. If you have an estranged child or are in a second marriage, the trust can help to make your wishes happen.

Sounds good? What’s the Downside?

Revocable trusts aren’t a cure-all. They’re generally more expensive and more of a hassle to maintain than a will. To put property in the trust, you have to retitle it in your name as trustee (so you’ll need to sign new deeds to property, new titles to cars, and forms changing account ownership for, well, accounts). They generally don’t give you a break on taxes or provide much in the way of asset protection. Like a will, it’s up to the folks you’ve chosen to honor your wishes – if they decide to make off with the money or property, then your loved ones will have to chase them down, so it’s critically important you choose the right person to make sure your wishes are followed.

Some promoters like to overpromise the protection while exaggerating the “horrors of probate.” In Georgia and Florida, where I practice, the probate process runs smoothly, particularly if all the family members are on board. I sometimes tell folks it doesn’t make sense to spend $10,000 today to avoid having to spend $1,500 in the future.

As with everything in estate planning, we recommend seeking a trusted advisor who can help you decide whether a revocable trust is right for you.


Welcome to leavewell.com, a site devoted to thoughts, strategies and musings on how best to plan for your future. Whether you have a lot or a little, a family business dating back a 100 years or a startup in the attic (we have one of those!), we hope you’ll find this useful? Have a question or suggestion for a future post? Just let us know! Thank you and happy reading!