By Kyle Hafstad, Estate Planning Advisor
Family businesses are built with the intent of longevity, but ensuring that vision becomes reality requires thoughtful succession planning. Many owners assume the business will naturally pass to the next generation, yet most do not survive beyond the second or third generation1—not due to a lack of potential but because transitions are often delayed or mishandled. Without a structured plan, leadership and financial decisions fall to family members under pressure, increasing the risk of business failure. Owners who take proactive steps can protect both their company and their legacy.
The first step is determining whether the next generation is interested in taking over. If not, the focus shifts to structuring an exit strategy—whether that means selling to an outside buyer, transitioning ownership to key management, or restructuring assets to align with family goals. If heirs are interested, preparation is critical. Successors need hands-on experience, a structured transition plan, and clearly defined roles to be positioned for leadership when the time comes.
Strong leadership is the foundation of a thriving family business, which is why a capable non-family management team is often necessary to ensure continuity. Even when heirs are involved, experienced managers can provide stability and help maintain business performance. If heirs prefer to remain passive owners, key executives need incentives—such as equity stakes or long-term compensation plans—to keep them aligned with the company’s success. Without the right incentives, critical leaders may leave, putting business operations at risk.
Ownership structure also plays a key role in preventing future conflicts. If multiple family members are involved, decision-making authority, compensation, and ownership stakes should be clearly defined. Equal distribution of shares does not always mean equal involvement, and disputes often arise when one heir is actively managing the business while others are passive owners. Establishing a valuation method in advance can help prevent disagreements over the company’s worth, while an equalization strategy ensures heirs who are not involved receive a fair inheritance without putting financial strain on the business.
Liquidity is another critical issue. Businesses are illiquid assets, meaning they cannot easily be divided or sold.2 If estate taxes, buyouts, or equalization payments become necessary, a lack of liquidity can force an unfavorable sale. Life insurance and other liquid assets can help cover these costs, preserving financial stability. With estate tax exemptions set to decrease,3 business owners who fail to plan ahead risk leaving heirs with unexpected tax burdens.
Charitable giving can also support long-term planning, particularly when heirs are not involved in the business. Donor-advised funds or family foundations allow owners to align their wealth with their values while also providing tax advantages.4 When structured with clear intent, charitable giving can unite family members around shared values while creating financial efficiencies in the estate plan.
Waiting too long to act is an enormous risk in business succession. Unexpected events such as death, incapacity, or economic shifts can leave a business vulnerable, forcing rushed decisions that diminish its value. Even for owners planning to sell, structuring an orderly exit early on can lead to better outcomes.
Succession planning isn’t just about passing a business down—it’s about ensuring stability, protecting value, and mitigating disruptions for future generations. By proactively addressing leadership, ownership, and liquidity, business owners can maintain control over their legacy rather than leaving critical decisions to chance. Connect with your Exencial advisor to discuss how you can get started with succession planning.
Sources
- Harvard Business Review (7/19/21) - Do Most Family Businesses Really Fail by the Third Generation?
- Investopedia (12/31/21) - Illiquid Assets: Overview, Risk and Examples
- Kiplinger (9/18/24) - Changes to Estate Tax Are Coming... Six Options Congress Could Take
- National Philanthropic Trust - What is a Donor-Advised Fund (DAF)?
Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial or legal advice. Please consult with your financial, tax, and legal advisors to determine plans for your individual circumstances.
Exencial Wealth Advisors is an SEC-registered investment adviser. Any references to the terms “registered investment adviser” or “registered,” do not imply that Exencial or any person associated with Exencial has achieved a certain level of skill or training.
