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By David L. Keligian, JD, MBA, CPA
Brown & Streza LLP

“Family owned, operated, and argued over”—
Logo on Sierra Nevada Brewing Company Products


Most people are familiar with the numbers – 80% of family businesses don’t successfully pass to the second generation. Of the 20% that do, 80% of them do not successfully pass to the third generation. This White Paper is about how to better those odds for family business owners.

Close work with many successful clients has taught me important lessons about business succession. I’ve learned as a result of hundreds of client situations, involving all types of business and personalities, in all types of circumstances. The creation of businesses. The acrimonious split up of businesses when there were feuding business partners or family members. Joint ventures, business purchases, business sales. The impact of death, divorce, and financial disasters. I have the benefit of seeing many examples of what worked, and what didn’t, and how to use those lessons to help clients reach their goals in family business succession planning.


Business succession – the process of transferring the value of a business from where it is now to where it ultimately ends up – is the biggest challenge family business owners face. The odds of successfully passing a family business from one generation to the next are daunting, and the odds of doing it again – to the next generation – are less than 5%! Most experienced business lawyers and accountants can help with income tax planning, estate tax planning, and related legal documents – trusts, shareholder agreements, and employment agreements.

But there are very complicated issues that have nothing to do with law or accounting. Successful family business succession planning must take psychology, family dynamics, the impact on key employees, and key customer relationships into account. It involves critical questions. Who will be the best leaders after the founders are no longer around? What conflicts may arise? Have key relationships been successfully transferred? These questions require careful reflection and thought. In some cases, outside specialists – consultants and psychologists – may be needed.


Successful family business succession planning is a process. By “process”, I mean a systematic, almost scientific consideration of a number of different factors to consider in making the correct decision – for you, your family, and your business. The answer is not pre-determined, because it depends on your desires and individual circumstances.

Ultimately, the successful business succession plan is one that gets you closest to meaningful yet realistic personal goals. Deciding what you want is one of the hardest questions for you to answer.

Your succession plan is implemented through a number of mechanisms – the creation of trusts, shareholder agreements, leases, employment agreements, structured family meetings, written business or business succession plans, or preparing the business for a third party sale. Those steps are the easy part! The hard part is deciding exactly what you want and how you can get there. The process involves making difficult decisions about the ability and desire of family members or long time employees to effectively do what needs to be done to insure the success of the business when you’re not around to help.


The easiest way to answer the question “what is business succession planning”? is by understanding what it isn’t. It is not about how to prepare your business for sale, or maximize its value – that is an end result of going through the process of making a decision about what is the best course of action for you. If the process results in a decision to sell your company, then there are all kinds of planning, strategies, and actions that will maximize the value of your business as you prepare to sell it. But the threshold question – what is the best succession plan for you – is the most difficult.

Family business succession planning is not about having a “buy-sell” or “shareholder’s agreement” in place. Although these are important legal documents for any business with multiple owners, an up-to-date buy-sell agreement is typically not, by itself, a business succession plan. It is the result of a family business succession plan.

Business succession planning is most definitely NOT the most typical plan I see – “I’m leaving the business to my children”. Based on our experience, that “plan” has the highest failure rate, including family acrimony and lawsuits. Imagine – you believe you are doing something generous for your family, but it results in bitterness, hurt feelings, broken relationships, and lawsuits.

A successful plan requires you to devote a great deal of objective thought to a number of issues. Can your children really run your business? More importantly, do they WANT to? Who is most capable of running the family business? When push comes to shove, who should have the final say in decisions when you are no longer around? Should certain children NOT be involved in the business?

These are not easy questions, but they are important ones that must be considered and resolved to allow a successful family business transition. A business succession plan is NOT just hiring lawyers to draft buy-sell agreements or employment agreements with key employees. Those legal documents may be important parts of a successful business succession plan, but they are not the plan. They are the result of a plan.

ANY and EVERY family business succession plan is the result of a rigorous process. The best decision is based on your individual desires and circumstances. Is your goal to have your children continue to run the business you created and grew? Or is it to provide them with financial security, even if that means the business is sold and the proceeds invested in ETFs? The hard part is deciding the best solution to achieve your goals, and whether those goals match reality. The “reality” part includes whether your children have the desire to manage, the ability to manage, and the ability to take over key relationships with banks, employees, and customers. Most importantly, if there are multiple capable children, will they accept one of them having final authority over the others?


Once that decision is made, the proper legal documents to implement your decision are relatively easy. The hard part is to balance the right business decisions with all the non-business issues and your overall personal planning. A simple (but actual) example. Let’s say you have two sons. One is a driven achiever who stepped into the family business and expanded its value tenfold. One is a stay-at-home dad who has no job and no prospects. But he’s a great dad.

Do you try to make sure that each ends up with the same amount of wealth? Is that fair to the driven, achievement driven son who has built up the family business? “Fair” does not necessarily mean “equal”. Does it make sense to keep control of the family business with the son who has contributed so much to its growth? Is that fair? To who? How do you avoid future disputes about your decisions when you are no longer around?

The family business succession process is not static. You may carefully, deliberately, and thoughtfully decide that you would like to sell your business. But years after that decision, you may see you have been successful in grooming an outstanding management team – employees who will run the business as good, or better, than you. That realization may change your business succession plan from a third party sale to a completely different strategy.


A successful family business succession plan requires the business owner to look at their company through different, completely objective eyes than they’re used to. How much is the business worth to a third party? How much is it worth to the employees? Can the business survive if the owner isn’t working in it? If not, what can be done about that now? Are there any family members who exhibit both the desire and ability to successfully run the business? Can those family members work with existing employees (and just as importantly, will existing employees work for them)?

These are lots of questions to think about. It’s hard work and very important. Some of the answers have nothing to do with logic. For example, the perceptions and relationships between family members. Even if children are very capable, can they get along once the founder is no longer around? Very few people can think through all of the ramifications by themselves.

Many clients have an emotional attachment to their business. That is understandable, but if their children are not interested in the business, it is better to look at the business as a source of family wealth, assuming the owner desires to transfer wealth to their children.


Many business owners keep looking ahead – after years and years of building a business, going through the ups and downs, avoiding (or surviving) disasters, they think that “someday” they will sell the business, take a chunk of money, and “retire”. Maybe travel the world. Maybe play lots of golf. Maybe move out of California to a ranch in Montana to avoid California’s high income taxes.

But objectivity requires you to be completely honest with yourself. What if you’ve been so focused on the family business that you haven’t taken trips, and you have no hobbies, and you hate cattle? What if you like going to your business and being the boss? What if, when you can’t work anymore, you will go absolutely stir crazy? There are many examples of people who die a very short period of time after “retiring”. If you haven’t carefully thought about what you want – what will truly make you happy – you can find yourself making a decision you end up regretting.

My most successful clients don’t need to sell their businesses. If they are successful, their business generates income they use to fill up their pension plans, buy real estate, and set aside investments. Their decision about family business succession is much easier, because it isn’t driven by economic need. It is based on what makes the most sense for them, given what they want.

Basing your retirement solely on “someday” selling your business and cashing out is a risky strategy. At the time you decide you want to sell, the market may be bad. You may want to retire, but current business conditions may force you to stay in the business until things “get better”. This is one reason why devoting attention to business succession is important even if you believe you will be running your business for many more years. The best planning incorporates financial considerations. Are you setting aside retirement funds to lessen your dependence on a future sale? Are their business-related investments you can make, such as buying the building you use?


One key strategy to consider in all of business succession is the “work backward” approach. As writer Stephen Covey says, “begin with the end in mind”. If your goal is retiring with sufficient assets and income to support your lifestyle for the rest of your life, you need to know how much in after tax assets you will need to generate the income you want. There are many financial planners who can help you determine this amount. The most important part of it is being realistic.

Are you really going to move from the California coast to a place in Arizona to save taxes and “downsize”? Is that realistic? Where do your children live? Where do your grandchildren live? Have you ever even been to Arizona? If you like it so much, why aren’t you there already? How much of a cushion should you plan for? If you think you need $5,000,000 in investments, are you protected if a financial crisis depletes 40% of the value of your investments in a few months?


Part of the family succession process is training, teaching the right values, and transferring the founder’s wisdom to successors. If successors understand how hard it is to build the right reputation in an industry, and the time and effort it takes to successfully cultivate good relationships with customers, vendors, and employees, the business has a better chance of success. That mentoring is one of the most valuable legacies a founder can give.


Dividing a family business equally between children who are involved in management and those who aren’t always has an unhappy ending. I’ve never seen that plan work. My partners have never seen that plan work. The child who is the designated successor must be able to make the right decisions without having to debate them with people who have absolutely no clue. Even if you give control to a capable child who is operating the business, they must have the desire to do so.


Deciding what you want is complicated when you view it through the filter of what is achievable given legal issues, tax issues, financial issues, family dynamics, and business realities. That is why I strongly advocate using a team approach. Here are the benefits the team approach provides you.


Whatever you do will require legal advice and documents to successfully implement. The planning and documents will encompass much more than sale documents. There can be estate planning documents, employment and bonus agreements to tie up key employees, shareholder’s agreements, agreements to cement important relationships with key suppliers or key customers, and all the advice that goes into these areas.


Income taxes, estate and gift taxes, and cash flow forecasts are always important. Tax and business projections are critical, both during the time you are running your business and for your succession planning. And a reliable accounting system increases value for prospective buyers.


Lawyers are reasonably skilled in interviewing and counseling about family business issues. Less so about personal issues. Lawyers know about family dynamics, but are not trained in that area. What if you own a successful family business – one where your spouse and children are actively involved – and you’re considering a sale? Don’t you think it might be important to talk to your spouse and children and get their feelings and viewpoints? You might be the type of person who may be able to do this on their own, but a skilled professional who’s dealt with family dynamics in many situations can certainly help you.

I’m not talking about a “shrink”. I’m talking about a professional who specializes in counseling owners and family members about business situations, but who has specialized training. I know one such professional – now a practicing psychologist – who has a law degree and is a CPA. He practiced in both areas, then got a doctorate in psychology. His specialty is exactly this type of situation. If you use such a person, it doesn’t matter whether you agree with their input or not. The point is that they will certainly make you think and ponder your choices.

Management Consultants

It can be difficult for a family business owner to be objective about their business. This includes determining a realistic value for it, making sure the owners aren’t overlooking opportunities or properly capitalizing on the business’ strengths, and determining how to deal with weaknesses and threats. Objectivity is crucial.

The hardest area to apply objectivity to is people. If you have worked with your employees for many years, they may seem like family to you. And you may have employees who ARE family.  It can be very hard for an owner to objectively evaluate which people should assume responsibility and perhaps one day run the entire business. Do they have the ability to do so? Do they have the desire to do so? Will others in the business follow them? Will your bankers pull lines of credit if you aren’t personally involved?

People issues are the hardest issue to deal with in any business. You may have a knack for judging and evaluating people. But can you do so equally well when you’re evaluating the potential of a non-family member as compared to a family member?

Financial Planners and Investment Advisors

CPAs can sometimes help in financial planning, but typically don’t handle investments or provide investment advice. Investment professionals are important because they can help you determine how much in investments and investment income you will need to support your lifestyle as you proceed with your business succession planning.

Although many of my clients used their business to build substantial outside investments as well, some didn’t. They focused on building the value of their business and will have to face the question of how to prudently invest substantial sales proceeds. It is better to become acquainted with potential advisors long before you give them substantial sums to invest.

Risk Managers and Insurance Professionals

Many family business owners who believe they are protected from business risks with insurance really aren’t. Risk management is very complicated, and a true professional will be able to advise you where you have gaps in coverage, or are completely unprotected from common risks.

Sound advice about life insurance is also critical. It’s not just about protecting your family if you should pass away and the business is jeopardized. Life insurance can play a key role in employee benefit planning, creating “golden handcuffs” and other incentives to retain and reward key employees, and providing a means of equalizing wealth transfers if the right decision is leaving the business to one child and leaving other assets to other children.

Investment Bankers and Brokers

There is a reason I listed this category of advisors last. That reason is that they are invariably focused on just maximizing the value you receive in a sale. They are usually good at advising you on how to maximize the transaction value of your business, although we believe focusing on maximizing the sales value of a business is something that should guide your decisions the entire time you own your business.


Based on my observations of my most successful clients, here are some valuable tips about successfully running a family business.


The most successful businesses are those whose owners have a clear understanding of what fundamental factors really drive the value of their business. They proactively improve the areas that add that value. They emphasize repeatable processes that help them add to the value of their business. They tend to have stable and growing relationships with their key customers, because they know it is much easier to grow sales with existing customers than try to find new ones.


“The E Myth” by Michael Gerber is a must read. Many family business owners have heard the phrase “work on your business, not in it”. Regardless of whether Gerber came up with this phrase or not, it’s what The E Myth is about.
Gerber compares the average closely-held business to McDonald’s. McDonald’s is one of the most successful companies in the world. McDonald’s follows the same processes in all its restaurants, from Des Moines or Decatur to Tokyo. Mc Donald’s has a process for everything it does. It has a precise set of procedures for its employees to follow when, for example, they make French fries. So precise, in fact, that such processes may replace employees with robots.

The point is not robotics. The point is that McDonald’s has come up with the best system it is capable of devising for the preparation and serving of French fries and all its other menu items. And it makes sure its employees are trained to follow the process. So the McDonald’s French fry you buy in Des Moines or Decatur or Tokyo is prepared exactly the same way and tastes exactly the same.

The relevance to this for a family business is that the owner should develop and implement similar processes for each area of their business, whether it’s casting metal parts or selling used equipment. Once that process is developed and the employees are trained in following that process, the business owner is freed from constant supervision and worry in that area. The owner no longer has to devote so much attention or worry to that area, and can focus on working on something else.

This is how a family business becomes valuable independent of its owners. It is a very valuable objective for a business owner. It is an appealing characteristic for third party buyers. It adds value to the business. Even if the owner has no desire to sell, it frees them from part of the day to day stress of managing every detail. It adds to the strength and continuity of the business. It gives the business owner the comfort of knowing that if something happens to them, the business won’t fall apart.


We’ve found many of our successful family business owners feel a sense of isolation – as if they’re trying to solve an endless number of business questions by themselves. Many successful business owners who experience this feeling overcome it through several avenues.

A few have gained great value through instituting outside advisory boards. This only works if the process is robust. As an example, one of my clients has quarterly advisory board meetings. His outside advisory board consists of industry experts in accounting, finance, and consultants who directly work in his industry.

The meetings last a day or a day and a half. The board is compensated, and they have full access to financial and other information prior to the meetings. They are flown out to nice places, with nice meals and nice accommodations. A formal agenda is circulated before each meeting, and minutes are taken. Most importantly, the advisory board is very proactive – they question the CEO, they advise him, but most importantly they hold him accountable for action items.

If, for example, there is a discussion about the shortcomings of the COO, the CEO is provided with action steps to counsel and mentor the COO and must report back about those steps at the next advisory board meeting.

If the advisory board is properly selected, compensated, and empowered, it can provide incredible value to an otherwise isolated family business owner. The board can provide objective advice on a number of areas, including about whether key family or non-family members are capable of assuming leadership roles.


A good practice is a periodic SWOT analysis – where family business strengths, weaknesses, opportunities, and threats are systematically discussed and assessed. The more viewpoints you get on these topics, the more information you have to improve your business.

Management Succession

Having a strong management team in place who can independently run your family business has multiple benefits. First, it’s a form of disaster planning. You gain the peace of mind knowing that what you’ve tried to build up won’t disappear if something unexpected happens to you. Second, if you’re so inclined, it allows you to actually take time off from your business without having to sell it. Third, it adds a potential new buyer to your exit plan – your existing management, who have proven they have the ability to successfully run the business. Finally, proven management greatly increases the value of the business to third party buyers.

Management succession is a process. It is not just retaining and training good people, it is going through the process of figuring out how to tie them to your business for the long term. It may involve grants of equity, coming up with “golden handcuff” employee incentives, and a number of other strategies. It should be a priority, which means it demands thought, attention, processes, and an action plan.

Reliable Financial Reporting

Reliable financial reporting is a critical item. Not only does it help you run your business more reliably, it increases the value of your business. Reliable financial reporting will allow you easier access to financing, and also increase the value of your family business should you decide to exit via a third party sale.

When a buyer is looking to buy a business, they want to have confidence in the financials. If they don’t, they may still buy the business but they will do so at a discount, or on more onerous terms, than they would have otherwise.

Ongoing Legal Compliance

Legal compliance may sound dull. It usually IS dull. But sometimes dull can make, or save, you lots of money. I’ve seen situations where someone forgot to exercise a lease option, and the company lost its facility and was forced into a costly move. Boring details like having up to date employee manuals and making sure there are no new laws that impact your family business can turn into company-threatening events if your compliance is not up to date.


The most common succession options are:

  1. Leave the family business to family
  2. Leave or sell the business to employees
  3. Sell the business to other co-owners
  4. Sell the business to outside third parties

Each option has its unique do’s and don’ts. None of them are simple. All are manageable. If you have a sound business succession plan, the right choice is much easier.


Experience shows that lots of potential fights and lawsuits among family members can be avoided if the family business succession plan is properly communicated to family members. A good point to keep in mind is that probate and trust litigation is one of the most rapidly growing areas in the legal profession. I see lawyers handing out their cards and saying “I do probate and trust litigation”, and I remember 6 months ago they were telling people they were “premises liability experts”.

One cause of such litigation is that while they are alive, it is difficult and uncomfortable for parents to explain to their children why, for example, they are leaving the family business to Julie instead of Johnny. But it is important.
Wills and trusts can set forth decisions about family business succession issues, but not their rationale. In the past few years, when I see clients that have family business succession issues, I recommend they prepare a written business succession plan. It contains their goals, their reasoning, their decisions about business succession, and how those decisions will be implemented in buy-sell agreements, leases, and other legal documents.

The plan is memorialized and incorporated into minutes of business entities, and more importantly it is communicated and discussed with family members in a formal, structured family meeting or meetings. It may be uncomfortable, but the benefit is that all family members know that the family business succession decisions are the result of a deliberate, thorough thought process, as opposed to “Julie’s undue influence on her elderly parents as they lost capacity”, as our newly minted “probate and trust litigator” might couch it in a pleading.


Family business succession planning is not easy, but the hardest part isn’t the legal strategies to minimize income and estate taxes and shield assets from creditors. It’s sorting through your personal goals, and the personalities, motivations, and capabilities of potential successors and going through the objective process of trying to come to the best decision.


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About Brown and Streza
Brown and Streza LLP is a law firm providing integrated legal services in tax, estate, trust, real estate, business, business succession planning, and charitable planning, including representing non-profits and religious organizations. Located in Orange County, California, we serve families, businesses, entrepreneurs, philanthropists, and charitable organizations, focusing on helping closely-held businesses and their owners achieve their goals. For more information, please visit our website.

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