Succession Planning for Texas Family Businesses

Most family business owners in North Texas have answered this question in their head. Very few have answered it on paper:

Who runs this place after you?

Maybe your son has worked the shop since high school. Maybe your daughter is sharp as a tack but lives in Austin and has zero interest. Maybe your spouse keeps the books and has quietly wondered the same thing for years. And you’ve told yourself you’ll “get to the succession thing in a few years.”

If you’ve been saying “a few years” for a few years, keep reading.

I’m Harvey Baker Jr., a licensed Texas agent in McKinney. Here’s a plain-English starting point for succession planning in a family business: what it really involves, where families get stuck, and how to keep the plan from falling apart before it’s finished.

Succession is two handoffs, not one

Most owners think of succession as one moment. It’s really two separate handoffs:

• Management succession: who runs the business day to day. Who makes the calls, signs the checks, and keeps the customers.

• Ownership succession: who owns the business, and how they come to own it: a gift, a sale, an inheritance, or some mix.

They don’t have to be the same person, and they don’t have to happen at the same time. Plenty of owners hand over the keys years before they hand over the stock. Plenty of plans also stall because they solve one handoff and ignore the other.

Why family businesses get stuck

Nobody puts this off because they don’t care. They put it off because it’s hard. The usual reasons:

• The founder is the business. Stepping back feels like stepping away from who you are.

• Nobody wants to choose between the kids. So nobody chooses.

• Fair and equal aren’t the same thing. More on that below.

• The owner needs the business to fund retirement, and the successor can’t afford to buy it outright.

• The paperwork disagrees with itself. The will says one thing, the operating agreement says another, and the buy-sell (if there is one) says something else.

• The unplanned exit. Death, disability, or a health scare doesn’t wait for the plan to be ready.

Fair vs. equal: the Thanksgiving-table problem

Here’s the one that keeps owners up at night.

Say one child works in the business and two don’t. Leaving the business to all three in equal shares sounds fair. In practice, it can mean the one running the company ends up working for siblings who don’t, and every big decision turns into a family meeting.

Many families take a different route: the active child ends up with the business, and the other children receive other assets of comparable value. When there aren’t enough other assets to go around, some families use life insurance to create them. This is often called estate equalization.

Equal is a math problem. Fair is a family conversation. Have it while you’re here to explain your thinking.

Texas is a community property state, which can affect how a married owner’s business interest is treated. That’s a question for your estate attorney, early.

Common ways ownership moves to the next generation

Here are the usual paths, in plain English. Most plans use more than one.

• Gifting over time. The owner transfers shares gradually. Federal gift and estate tax rules can apply, so your CPA and attorney should be involved.

• Selling to the family member. Often paid over time through a promissory note, sometimes with outside financing. This can give the owner retirement income while the successor buys in.

• A buy-sell agreement among family owners. If siblings or cousins co-own the business, a buy-sell sets the rules for what happens when one of them dies, becomes disabled, or wants out.

• Trusts and other estate planning tools. These can shape who controls the business and when. Your attorney drafts them.

• Inheritance at death. Simplest on paper. Often the messiest in practice, especially without a written plan.

How the transfer is structured can make a big difference in taxes and in who controls what. Talk with your CPA or attorney before you choose.

Where life insurance fits

Life insurance doesn’t make the plan. It helps keep the plan from breaking. Common uses:

• Estate equalization. Coverage on the owner can create an inheritance for the children who aren’t taking over the business.

• Funding a family buy-sell. If a co-owner dies, the policy can give the others cash to buy that share from the family instead of ending up in business with someone who never wanted to be.

• Key person coverage during the handoff. If the founder dies halfway through the transition, cash can help the business keep its promises to lenders, customers, and employees while the successor steps up.

• Protecting the note. If the successor is buying the business over time and something happens to them, coverage on the successor can help make sure the owner and their spouse still get paid.

• Estate liquidity. For larger estates, coverage can provide cash for taxes or settlement costs so the business doesn’t have to be sold in a hurry to cover them.

Coverage, eligibility, and rates vary by carrier and health. The goal isn’t to buy everything. It’s to make sure the unplanned exit doesn’t wreck the planned one.

When the next generation doesn’t want it

Sometimes the honest answer is that nobody in the family wants to run it, or the right successor isn’t ready yet. That isn’t a failure. It’s information.

A sale to an outside buyer, or a recapitalization (selling part of the business to an investor while you stay involved and keep a stake), can be the better handoff for everyone. If that’s on your radar, call or text me and we’ll talk through where to start.

Nothing in this article is a valuation, a tax opinion, or legal advice. Consult your tax or legal professional for advice specific to your situation.

A starting checklist

1. Name the successor, or admit you don’t have one yet. Both are useful answers.

2. Talk to the family. Separately and together. Kids in the business and kids outside it.

3. Write a timeline for the management handoff. Which decisions move first? Which relationships (customers, lenders, vendors) need an introduction?

4. Know your number. What do you and your spouse need after you step back? A licensed financial professional can help with that piece.

5. Line up the documents. Will, trusts, operating agreement or bylaws, and buy-sell should all tell the same story.

6. Build your team. A CPA, an estate attorney, and a financial professional, in the room before you need them.

7. Protect the plan while it runs. Look at what happens if you, or your successor, can’t finish the handoff.

Hypothetical example for illustration only: Picture a family-owned landscaping company in Collin County with about 25 employees. The founder is 60. His son has run the crews for ten years. His daughter is a teacher in Houston with no interest in the business. The founder wants his son to own it, his daughter treated fairly, and his wife’s retirement funded. With his CPA and attorney, he sketches a plan: the son buys the business over time on a note, coverage on the founder creates an inheritance for the daughter, and coverage on the son helps protect the note payments if something happens to him before it’s paid off.

Common mistakes

• Waiting for the “right time.” It rarely shows up on its own.

• Assuming the kids know the plan. If it isn’t written down and talked through, they don’t.

• Treating equal as fair without a conversation. The math can be right and the family can still end up split.

• Handing over the keys but not the relationships. Customers, lenders, and key employees need to trust the next leader, too.

• Documents that contradict each other. The will, the operating agreement, and the buy-sell should agree.

• No plan for the unplanned exit. A ten-year handoff needs protection in year two.

Questions to ask before you start

• Who is ready, or could be ready, to run this, and by when?

• Do we want ownership and management to transfer at the same time?

• How do we treat the children who aren’t in the business fairly?

• What do my spouse and I need after I step back, and where does it come from?

• How should the transfer be structured for taxes and control? (Ask your CPA and attorney.)

• Do our will, operating agreement, and buy-sell say the same thing?

• What happens if I die or become disabled before the handoff is finished? What if my successor does?

• If nobody in the family wants it, what are our outside options?

Coverage, eligibility, and rates vary by carrier and health. Cheap is a price. Right is a fit.

Get your Gap Map (free, 20 minutes)

If you want a clean starting point, I built a one-page Gap Map: where your home, your business, and your exit still depend on one person. Three columns. Plain English. You keep it either way, whether you buy anything or not.

Call or text 430-373-7752 with the word MAP for a free one-page Gap Map. Or learn more at bakerlegacypartners.com.

Built by you. Protected without you.

Insurance products involve costs, limitations, exclusions, and suitability considerations. This article is educational and is not tax, legal, or financial advice.

Harvey Baker Jr., Licensed Texas Life, Accident & Health Agent, TX License #3470534. Coverage, eligibility, and rates vary by carrier and health.