Failing to Plan is Planning to Fail: Key Considerations for a Successful Family Business Transition

Family business dynamics can be tremendously complex. There can be a wide range of opinions among family members regarding their contributions toward the business and what the future should look like once the current owner is no longer involved.

Business planning with family members raises many intensely challenging questions, including:

• What is the best way to reward the efforts of family members who have dedicated years of service to the business?
• How should you “fairly” provide for those who have moved away and are uninvolved in the business?
• Does the “heir apparent” even want to continue with the family business?
• If the business is jointly held by siblings, what is the likelihood of success for co-ownership in the next generation?
• Is now the right time to approach family members on a potential buy-out? Or is it better to seek a strategic buyer or outside third-party?

While the questions above may be difficult to answer, business owners should not let family dynamics or complexities prevent the successful implementation of transition plans. Family-owned businesses must decide what a successful business transition looks like and then proactively plan to accomplish those goals.

A True Success Story: The Power of Family Business Estate Planning

While it is very difficult to please every family member, partnering with estate planning professionals and other advisors can help to facilitate timely implementation of business succession and transition plans. Significant and purposeful results can be achieved with appropriately executed planning techniques. One such example is an Eide Bailly client named Jack (name and details have been changed to protect privacy).

Jack was first introduced to Eide Bailly planning professionals in 2014 when he was 86 years old. Like many family business owners, Jack did not have any estate planning or business succession plans in place. His total net worth of $40 million included an S-corporation appreciating in value and farmland in several states. Jack’s goal was to leave the S-corporation stock (valued at $21 million) to his son to operate the business and distribute his remaining assets to his other children.

Eide Bailly’s teams advised and recommended a grantor retained annuity trust (GRAT) strategy for Jack. GRATs can be an extremely effective and efficient estate planning tool allowing growth and appreciation to pass to beneficiaries free of estate or gift taxes. With a GRAT, a grantor (creator of a trust) transfers assets to an irrevocable trust. The grantor may create a series of short-term GRATs, with annuity payments rolling into subsequent GRATs with the returns in excess of the Section 7520 rate being received by the trusts for the benefit of beneficiaries.  

By 2022, Jack had transferred 59% of the S-corporation to his son using no gift or estate tax exemption. This tremendous result allowed Jack to transfer significant wealth to his son, leaving Jack with gift tax exemption to make gifts to his remaining children.

To further advance his planning, in 2021, Jack transferred farmland and ranch properties to a limited liability limited partnership (LLLP). Eide Bailly’s Business Valuation team assisted with valuation of corporate stock and partnership interests. A Financial Services professional also evaluated Jack’s financial position to assess his cash flow and anticipate future expenses to ensure Jack maintained his standard of living throughout his lifetime.

Through collaborative planning among wealth transition, business valuation, and financial planning, Jack was able to transfer $34.4 million of wealth to his family with the use of only $9 million of his estate tax exemption.  

Establishing a Key Person to Continue Your Legacy

To effectively transfer the family business, it is also important for business owners to mature and empower certain key persons who are critical for business transition. This individual typically possesses the necessary acumen, judgement, and knowledge that is vital to the success of the business. They are also able to implement the operational and organizational aspects of the business and harness the vision, skills, and capability to follow through on business decisions. Your key person should be ready, willing, and able to run the business should you suddenly not be able to.

Let’s return to our real-world example with Jack to illustrate the importance of developing key persons and refining key person planning when the unexpected arises. Following Jack’s transition of the business to his son, Kyle, it was time for Kyle to carefully consider how he was going to continue his family’s legacy and who his key person would be in the event of Kyle’s absence or death. Remember – continual family business planning always needs to be considered.

Through much deliberation and consideration, Kyle selected his son, Jacob, as the key person to continue the family business. However, after two years of developing and building Jacob as the next leader, Jacob decided that the family business was not for him.

What now? Fortunately, Kyle was able to consult with members of the Eide Bailly Business Valuation team who used a strategic interview and management survey process to determine who was best suited as the key person. Kyle successfully redeployed his revised strategy with this new individual. This allowed Kyle the ability to focus on the success of the business and skill development for the new key person.

Step Confidently Towards the Future of Your Family Business

Family business owners are far more likely to achieve a successful business transition when they have strategized a plan that considers their personal goals, involves appropriate family members, and cultivates a thoroughly prepared key person. In addition, coordination between various professionals (tax, legal, accounting, financial, insurance, business valuation and others) are critical to achieve success in the transfer of your family business.