3 Considerations for a Smooth Transition

There’s a reason family remains at the heart of 32 million U.S. businesses that account for 54% of our gross domestic product (GDP) and 59% of the country's employment.¹ Successful family-owned businesses tend to share certain qualities like deep industry expertise, longstanding customer relationships, and more flexible business structures, providing greater agility and faster responses to change. Many embrace strong family values and share a passion for creating opportunities for economic advancement in the communities where they live and work. These deep community ties help to further enhance customer trust and loyalty, which leads to business longevity.

Yet, despite these strengths, succession remains a critical challenge for family businesses. Only 30% of family-owned businesses successfully transition to the next generation, with roughly 12% making it to the 3rd generation, and only about 3% continuing on to the 4th generation.² 

Overcoming the odds

Proactive planning is critical for ensuring the smooth transition of ownership and management to the next generation. Planning helps to ensure the right legal documents are in place while addressing any gaps in leadership, family conflicts, liquidity issues, and more. With proper guidance and preparation, family businesses can overcome these and other challenges. To get started, consider the following steps:

1. Prioritize communication

   Trust and transparency are key to building and maintaining relationships among all stakeholders, which may include key employees or other non-family contributors, or family members who do not actively participate in the business. Consider establishing a Family Council to promote communication around topics including roles and responsibilities, business finances, and future plans for the business.

   A Family Council provides a forum for family members to discuss and address issues impacting the business and its future while also helping to create a healthy separation between personal family matters and business matters. In many cases, enlisting the help of an independent business exit planning advisor can reduce the potential for family conflict. As an independent third-party, your advisor can communicate complex or contentious matters to family members, educate them on business wealth strategies aligned with your family values, or serve as a mediator if disagreements do arise.
   
   

2. Draw up a Family Constitution

   Another way to help strengthen communication is to create a Family Constitution. The Family Constitution seeks to prevent conflicts that can tear families apart and diminish fortunes by establishing a set of rules around the family’s wealth and core values. It creates a governance structure for navigating your family’s affairs, resolving conflict, and reducing complexity. You can create this document yourself or enlist one of your professional advisors to help, such as your legal or wealth advisor.

   While it is not a binding legal agreement, a Family Constitution can help eliminate family discord by increasing clarity and obtaining buy-in from all stakeholders. This is especially important when it comes to making decisions about who will actively lead and participate in the family business, and how business profits are distributed among contributing family members and those with no direct control or involvement in the business, as the business grows in value. An effective Family Constitution should specify:

   • How wealth is to be used by family members
   • Any limitations on spending, investing, or donating family wealth
   • Who is responsible for making investment and wealth distribution decisions
   • How other family members can provide input or impact decision making
   • How family members can work together to perpetuate family values and preserve wealth for future generations
     
     

3. Protect everyone’s interests with a buy-sell agreement

   One of the greatest risks family-owned businesses face is the unplanned sale of a stakeholder’s share in the business. This is especially disruptive if the business lacks the liquidity to buy out a stakeholder, or if a family member seeks to sell their ownership stake to an outside party, without consensus from other family members. Putting a buy-sell agreement in place can help mitigate these and other risks to family unity and business continuity.  

   A buy-sell agreement is a legally binding document that helps to ensure a friendly and orderly succession of the business by:

   • Setting the terms and conditions for the sale and purchase of shares of the business in the event of death, disability, divorce, disagreement or distress
   • Protecting the family’s control of the business’ equity by establishing decision-making criteria and processes governing the sale, transfer, and succession of ownership
   • Addressing liquidity options and how transactions will be funded
   • Including an agreed-upon method for valuing shares upon a sale
     
     

   Buy-sell agreements can also help create long-term value for the business and its stakeholders by addressing risks outside of a sale or transfer of ownership. For example, anyone with a vested interest in your company may require you to have a buy-sell agreement in order to do business with your company. Without it, you may not be able to get a loan to fund capital equipment or business expansion goals, or you may lose a client that can’t bear the potential risk of a disruption to your business.

   To find out how a well-drafted buy-sell agreement can help protect the interests of stakeholders while creating a path for the multigenerational longevity of your family business, listen to our latest podcast episode of Frank Wealth Insights. To learn how your team of independent wealth planning professionals at Return on Life^® Wealth Partners can help you and your family pursue the Return on Life^® you desire, contact us today for a free consultation.

About Return on Life^® Wealth Partners

Return on Life Wealth Partners is an independent Registered Investment Advisor (RIA) founded in 1994, with headquarters in Cleveland. The team provides comprehensive wealth planning services to individuals, families, and business owners. By examining clients’ lives before their money, Return on Life^® aligns its advice with clients’ values. This personalized approach also extends to the institutional and corporate retirement plan services available through 401(k) Prosperity^®.

¹Conway Center for Family Business, MAY 2025, https://www.familybusinesscenter.com/resources/family-business-facts/
²Family Enterprise USA, 28 NOV 2023, https://familyenterpriseusa.com/feusa/family-businesses-74-thrive-30-years-reveals-research/

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