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Investing in Your Family: Creating a Family Business Succession Plan

| November 24, 2021

No matter how successful your family business is today, at some point in the future, its ownership may need to change hands. Without a business succession plan, this transition can be fraught with hurt feelings, internal strife and dysfunction, and financial inefficiencies. What should a family business succession plan include, and how can you get started?

What is a Family Business Succession Plan?

According to the National Bureau of Economic Research's Family Business Alliance, only about one in three family-owned businesses have a succession plan—a written plan that outlines what happens when the current owner or leadership steps down.

Without a succession plan, the sudden death, retirement, or incapacity of the owner can send the business into a tailspin as the remaining members and officers try to figure out their next steps while keeping up with the business's day-to-day operations. The absence of a designated leader may lead to infighting and divergent goals. But with a succession plan, business stakeholders may focus their energies on what matters most: helping the business sustain itself and grow.

What Should a Succession Plan Include?

Ideally, a succession plan has two key categories:

  • Transfer of the business interest (which may implicate estate and gift taxes)
  • Maintaining business operations and growth

In other words, a succession plan shouldn't just list off the people to replace the current owners. It should also include strategies for moving the business forward after a major change in leadership. Will you need to rebrand? Expand your customer or client base? Change the way the business is legally structured?

Transferring a family-owned business to the next generation of family members may be a financially and legally complex process. There are several ways to accomplish this, however, and the right choice for you depends on factors like the size and profitability of the business, the owner/seller's desire to maintain a financial stake in the business after retirement, and the prospective tax treatment of the transfer.

Some of the business transfer options available include:

  • An installment sale
  • A bequest
  • A grantor retained annuity trust (GRAT)
  • An outright gift
  • Equity recapitalization
  • Buy-sell agreement

Installment sales, equity capitalizations, and GRATs may allow the current owner to continue to maintain some control over the business after it passes on to the next generation. Meanwhile, bequests and gifts may receive more favorable tax treatment than an installment sale or buy-sell agreement. Your financial professional may be a valuable guide in helping you navigate this process and draft a workable succession plan.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

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