Technical Issues Surrounding Business Succession

Practical tips divulged.

July 24, 2008
by Anthony Rizzutto, CPA/PFS

Family-owned businesses are very important to the United States economy. Unfortunately, this vital area of our financial system has a poor survival rate. There are several reasons why family businesses have a tough time making the transfer from one generation to another:

  • Lack of viability of the business
  • Lack of planning
  • Little desire on the owner's part to transfer the firm
  • Reluctance of the owner's children to take an interest in the business.

But, lack of planning is often the main cause of transfer failure.

A successful transfer from one generation to the next requires planning in at least the following four areas

  • A business strategic plan
  • A family strategic plan
  • A succession plan
  • An estate plan.

The involvement of the family in setting business goals gives everyone a clear picture of the future. A family plan identifies each member's role in the business. The succession plan spells out how the generational transfer will occur and the estate plan ensures that the business goes primarily to the heirs rather than paid out in excessive estate taxes.

Business succession planning is not a complicated subject; the building blocks for a plan are quite straightforward. But the process is very complex, involving many technical and psychological issues, which sometimes overlap.

Technical Issues Psychological Issues
A business valuation must be performed
Sibling rivalries
Property and estate law issues need to be addressed
Owner's subconscious need to retain control
Consideration must be given to federal and state transfer tax law

In their book, Estate & Business Succession Planning, Russell Fishkind and Robert Kautz noted, "The key to the successful transfer of a family-owned business is not only to structure the transfer in the most tax-efficient manner, but also to structure the transfer in such a manner as to simultaneously promote family harmony, continuity and leadership. The implementation of a successful plan assures the safe passing of the torch."

Issues in the Family Business

The U.S. Small Business Administration lists the following issues most family businesses face:

  • Participation — who can participate in the family business and under what circumstances?
  • Leadership and ownership — how to prepare the next generation to assume responsibility for the business.
  • Letting go — how to help the entrepreneur let go of the family business.
  • Liquidity and estate taxes.
  • Attracting and retaining non-family executives.
  • Compensation of family members — equity versus merit.
  • Successors — who chooses and how to choose among multiple successors.
  • Strengthening family harmony.

Succession Planning

A well-developed succession plan is the best vehicle to address many of the issues identified above. Your client's plan should consider estate and gift tax ramification, your client's willingness to let go and family members' willingness to commit to the business. A formal business valuation should be commissioned to incorporate the business succession plan into the estate plan of senior family members. The effect of the business succession plan on retirement planning and maintaining current lifestyle should also be considered.

Obstacles to Succession Planning

There are two main obstacles to succession planning. First, the senior members of the family are so immersed in the day-to-day operations of the business that they fail to realize the importance of implementing an effective business succession plan.

Second, many owners have strong personalities and feel more comfortable remaining in control. The idea of passing the torch may be perceived as a threat to that control.

If your client fails to realize the importance of succession planning soon enough, a life's work could be in jeopardy.

The Process

Passing the Torch, written by Mike Cohn, identifies seven "hurdles" one must clear to produce and implement a viable succession plan:

  1. Goal Setting
  2. Solving Family Conflicts
  3. Recognizing Stages of Life (And Their Impact on Business Decisions)
  4. Commitment
  5. How to Let Go
  6. How Much Does the Owner Need to Retire?
  7. Keeping Key Employees During a Transition

It is well beyond the scope of this article to delve into the nature and complexity of these tasks. They are listed here as a guidepost for the reader.

The Mission

Your clients must distinguish between their business needs and their needs as owners. Doing so will help them focus on the big picture.

Author John Brown (How to Run Your Business So You Can Leave It in Style) posed three key questions the business owner must ask:

  1. How to make the business enterprise valuable?
  2. How to find a way of converting that value into cash for their eventual use?
  3. How to integrate their personal needs, income, financial planning, and estate planning with the workings of their business?

Stephen R. Covey, in his bestseller Seven Habits of Highly Effective People, identified two important elements that apply to succession planning: (1) be proactive and (2) begin with the end in mind.

There are basically four ways your client can leave. The choices are retirement, death, disability and bankruptcy.

Retirement under terms and conditions favorable to the business owner is the most desirable choice. To accomplish this goal your client must "begin with the end in mind" and be "proactive" in the planning and implementation of the steps necessary to achieve his goal.

Beginning with the end in mind, the business owner has several options. The business can be transferred to children or other family members; it can be sold to key employees, a third-party or liquidated.

A viable succession plan is an absolute necessity if your client decides to transfer to his or her children.


Again, succession planning is not complicated. One "begins with the end in mind" and then takes a "proactive" approach to reach that end.

But the process is complex. There are technical and psychological issues to deal with such as transfer taxes, financing and sibling rivalries. What are the retirement needs of the senior members of the family? Would it be better to sell to a third party? Are family members capable of stepping into a leadership role in the family-owned business?

What an interesting and fascinating area to practice in.

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Anthony V. Rizzutto, CPA/PFS, CVA, CDFA is the owner of Rizzutto Financial Consulting, specializing in business and personal financial planning, business valuation and litigation support in the divorce arena. He is a member in the AICPA Financial Planning Section, National Association of Certified Valuation Analysts (NACVA) and the Louisiana Society of CPAs. Anthony can be reached at (225) 925-0000.

Reprinted with permission from
Lagniappe magazine and the Louisiana State Society of CPAs.