Taking a thoughtful approach to transitioning a business to the next generation

At some point, nearly every business owner faces the question of transitioning ownership. The business often represents the single largest asset on a business owner’s personal balance sheet, and its value can represent a lifetime of focus, energy, and work. Given this personal investment, the decision to keep the business within your family may seem like a natural step — but a lot goes into making the transition of a business to a next-generation family member successful.

With research showing that only about 33% of family businesses are successfully transitioned to the next generation,¹ key considerations should be weighed, and significant planning should be undertaken to help ensure a successful transition. Here are a few questions to ask:

When looking at a business, its relative health, risk situation, capitalization, and the strength of its management team are all things to consider before a transition. The healthier the business, the more likely the transition will be successful.

According to Eric Smith, Business Owner Advisory Strategist, Wealth & Investment Management, Wells Fargo Clearing Services, LLC, “You probably don’t want to hand the reins over when you’re in the middle of building out a critical new initiative that will consume a lot of capital, need new employees, or otherwise tax the existing structure.” He has found the best time to transition is usually when the business’ foreseeable future appears steady and positive.

The best family business transitions tend to be where the family member running the business and his or her management team are aligned on the mission, purpose, and culture of the business, so the current management can be a bridge to the next generation being successful in carrying out that mission.

In addition to continuing its mission, a successful transition means the next generation is sufficiently prepared for the leadership role. They need to understand the management and operational structures, the complexities of the books and records, and how to make decisions relative to growth, risk, and capital structure.

You should have an “exiting” first generation well prepared to pass the baton to the next generation. Sometimes the founding generation hangs on and can’t quite seem to leave.

A key to a successful transition is to start the process early, and don’t be afraid to reach out for help. In addition to specialists who can assist in taxes, estate planning, and the law, a family business advisor specializing in succession planning can be very helpful in addressing overall readiness and goal alignment. Open and timely communication can be the key to successfully transitioning a business to the next generation.

¹ “Second Generation Family Leaders Don’t Have It Easy, Neither Did Their Predecessors,” Forbes, July 2023

Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.

Wealth & Investment Management (WIM) provides financial products and services through bank and brokerage affiliates of Wells Fargo & Company.