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Two Types of Family Business Succession Plans

As a family business owner, one of the most important things you can do is to create a business succession plan to ensure a smooth transition to the next generation. While there are many factors to consider, such as whether or not to continue as a family business or to sell and whether the potential inheritors are capable of managing the company, one of the most important considerations is the type of succession plan that will be most effective for your family enterprise.

There are two types of family business succession plans: financial and operational. The financial succession plan focuses on transferring ownership and mitigating taxes. In contrast, the operational succession plan deals with governance, management structure, and ensuring that the next generation has the expertise to run the business effectively. Both are essential to ensure the continuity of the family business.

Financial succession planning is critical to ensure that the transfer of equity in the family enterprise to future generations is as seamless as possible. This type of plan is often used to mitigate taxes on the transfer of ownership and minimize family conflicts. However, research shows that most family businesses across generations need to pay more attention to this vital aspect of their future planning. The lack of a financial succession plan can have ramifications beyond tax liabilities, leading to conflicts and battles between family members. However, with a financial succession plan, the potential for severe conflict is considerably lessened.

Operational succession planning ensures that the next generation has the skills and expertise to run the family enterprise effectively. This type of plan is often called the “soft” aspect of succession planning, but it is essential to ensure continuity. Family business owners recognize that learning how to run the company is critical for continuity, and this often requires operational succession planning.

Flexibility is critical when it comes to creating a family business succession plan. The best strategies can adapt to unforeseen events, such as changes in business or family circumstances. Your plan should be reviewed and updated regularly to remain relevant and effective.

In conclusion, a family business succession plan is essential for ensuring the continuity of your family enterprise. By understanding the two main types of succession plans, financial and operational, and providing that your plan is flexible and adaptable, you can ensure a smooth transition to the next generation and the ongoing success of your family business.

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