Succession planning for family-owned businesses is one of the most important, and most overlooked, parts of running a successful enterprise. Whether your business is in Dallas, Houston, San Antonio, or a small Texas town, a clear plan ensures your company’s future remains stable and your legacy endures.
When Texas family businesses plan for succession, they typically face three key challenges: people, taxes, and cash. It’s also important to recognize that succession usually involves two separate decisions, who owns the company and who runs it. Those roles can overlap, but they don’t have to. A solid plan addresses both. Now, let’s look at how each of these issues can impact your family-owned business.
The People
Transferring ownership in a family business can be one of the most emotionally complex parts of succession planning. Deciding who will lead, whether it’s a child, sibling, or trusted employee, can quickly become a point of tension if expectations aren’t aligned early.
In Texas, many family-owned companies are multigenerational, with parents hoping to pass the business down to their children. However, not every successor has the interest, skill set, or temperament needed to manage day-to-day operations. That’s why it’s crucial to:
- Separate ownership succession from leadership succession. You can transfer ownership over time while keeping management with the best-qualified person, family or not, using governance structures, voting agreements, employment agreements, or trusts.
- Assess leadership readiness early. Evaluate not just family ties, but also the experience, personality, and long-term goals of potential successors.
- Create a transition plan. Allow time for mentorship, hands-on training, and a gradual shift of authority to help ensure continuity and stability.
- Put everything in writing. Verbal promises often lead to disputes later. A written, legally enforceable succession plan helps minimize misunderstandings and protects all involved parties.
- Align the plan with your governing documents and contracts. Company (operating) agreements, bylaws, shareholder agreements, and buyer-sell agreements often restrict transfers, require consents, and define who gets voting management rights. If those documents do not match the “plan,” the documents control, even if they do not result in the desired outcome.
- Plan for incapacity, not just retirement or death. Build a clear path for who can sign, manage, and vote if an owner is temporarily or permanently disabled. (For example: successor managers or officers, powers of attorney, and disability-trigger provisions in buy-sell agreements.)
The Taxes
Texas may not have a state income tax, but federal estate and gift taxes can still take a significant toll on a family business if the transition isn’t structured carefully.
Without proper planning, heirs could face large tax liabilities that force them to sell part (or all) of the business just to cover costs. To avoid this, business owners, with advice and guidance from their CPA or tax advisor, may want to:
- Establish or update buy-sell agreements. These contracts define how ownership transfers when an owner retires, becomes disabled, or passes away, and can set a valuation method and transfer terms that make the transition more predictable as well as support better tax planning.
- Consider life insurance funding. Policies can provide the liquidity needed to fund a buyout or cover estate taxes, preventing disruption to operations.
- Build a valuation process that will hold up in real life. Whether you use an appraiser, a formula, or an agreed method, set a schedule to update it. A stale number is how buy-sell agreements turn into lawsuits.
- Coordinate the business plan with the estate plan. Wills, trusts, beneficiary designations, and entity documents should point in the same direction, especially if the goal is to keep control consolidated or to treat children fairly when only some are active in the business.
- Do not ignore Texas community property. How the ownership interest is characterized (separate vs. community, and what rights a spouse may have) can change the outcome in a death, divorce, or buyout scenario.
- Work with experienced legal and tax professionals. Texas Estates Code and the Texas Business Organizations Code include specific rules for ownership transfers, and overlooking even one can cause serious complications.
A well-crafted plan not only ensures a smoother transition but also shields the family’s wealth from unnecessary tax burdens.
The Cash
Even when the right person is chosen and taxes are properly addressed, funding the transition can still pose a challenge. A succession plan without financial backing is just a good idea on paper.
Options people tend to use for funding a business transfer include:
- Insurance proceeds. Life or disability policies can provide immediate cash to purchase ownership interests.
- Installment payments. Allow the next generation to gradually buy out the current owners.
- Business-funded buyouts. The company itself can redeem ownership interests under an entity-style buy-sell agreement.
Whatever finding method you use, match it to the valuation method and review it regularly. Insurance coverage and pricing that made sense three years ago may be wildly wrong today.
Why a Succession Plan Is Crucial for Texas Businesses
Without a coordinated plan, your governing documents and contracts may not match Texas default rules, and Texas law may fill the gaps in ways you did not intend, and that can lead to outcomes no one intended. The result may be family conflict, unexpected tax exposure, or even the forced sale of a long-standing enterprise.
A comprehensive Texas succession plan helps to:
- Prevent default rules from filling gaps in the business’s fate.
- Minimize operational disruptions for employees and customers.
- Protect the business’s legacy for future generations.
- Balance family dynamics and business goals through clarity and structure.
- Keep decision-making moving during incapacity, disputes, or an unexpected death, so payroll, banking, and contracts do not stall.
Start Planning Today
Succession planning isn’t just about transferring ownership; it’s about protecting everything you’ve built and ensuring it thrives for decades to come.
At Clausewitz Reyes, our attorneys help Texas business owners navigate the legal, financial, and interpersonal complexities of family succession planning. From drafting buy-sell agreements to structuring ownership and governance documents and coordinating with your CPA or tax advisor, we’ll help you build a plan that safeguards your company’s future.
Speak With an Attorney Today
Don’t leave your family business’s future to chance. Contact Clausewitz Reyes to start your Texas succession plan today.
