According to Forbes, family-owned and family-controlled businesses account for 87% of US companies, and 54% of U.S. GDP. While those numbers are high, they have a limit. A Family Business Alliance report notes that only 30% of family businesses pass to a second generation and just 12% transition to the third generation. A mere 3% of family businesses are owned by the fourth generation of a family.
Those figures don’t need to be discouraging for the owners of a family business. Thinking about, and planning for, a generational transfer can help make the process easier for keeping a business in the family. A deliberate and prescribed plan can allow new family member business leaders to prepare for their coming role, detail a timeline for succession, and describe the steps necessary to transfer ownership to heirs.
Handing Over the Reins
If you’re like most family business owners, you’ve worked hard to build a successful company. But you may have been so focused on growing the business that you haven’t planned for the day when you’ll hand over the reins to someone else in your family.
A succession plan will guide you through this process by helping you determine how and when you will exit the business and who will assume leadership after you leave. For example, do you plan to retire by a certain date and use money from the business’ sale to fund your retirement? Or do you want to use these proceeds to start a new company?
Creating a succession plan will force you to think about the company’s future leadership. This can be especially challenging for family businesses due to relationship dynamics that exist in most families. For example, an older child might assume he will lead the company, but if his younger sibling is more qualified for leadership, she might be tapped instead. This could result in family conflicts down the road.
Remember that leadership roles and responsibilities in the future will be different than they are today. So, think about what kinds of skills, experience, and talents leaders will need to be successful in the years ahead.
Another challenge is letting emotions affect decision making. Family members can get sentimental when it comes to the business that bears their name, which can lead to succession decisions that might not be in the best interest of the business or all stakeholders, including non-family employees.
You must determine not only which family member is most qualified to lead the company, but whether this person wants to assume leadership. If a family member is actively involved in the business and demonstrates leadership qualities, the answer might be obvious. If it’s not, you may need to meet with family members to discuss whether it’s possible to keep the business in the family after you step away.
Succession Planning Tips
Here are six tips to help you as you begin the family business succession planning process:
1. Get started early. It’s never too early to start succession planning, though three to five years before your planned exit is the minimum. The sooner you get started, the more time you’ll have to identify and train new leaders, transition relationships with clients and vendors to them, and begin a smooth and seamless business exit for yourself.
2. Think about the roles of non-family employees. Your exit from the business may cause uneasiness among employees who aren’t family members, especially if you have close, long-term relationships with them. You might have to consider the fact that a non-family member may be more qualified for leadership than a family member.
If you decide to tap a non-family member for leadership, talk openly and honestly with everyone about this ahead of time to lessen the potential for hurt feelings and damaged relationships.
3. Start training your successor. It’s your responsibility to make sure your successor is ready to lead the company when you step aside. This includes every aspect of running the business, from operations and finance to sales, human resources, and information technology. Involve your successor in the strategic planning process and get his or her input on important decisions about the company’s direction.
Also make sure your successor receives any necessary training or education during the transition period, such as advanced degrees (e.g., an MBA) or technical certifications.
4. Keep the communication lines open. Communication is especially important in family businesses because of the sensitive nature of family relationships. Misunderstandings about who will assume which roles in the business can lead to hurt feelings and irreparable relationship damage. To avoid this, communicate with all family members throughout the succession planning process, and don’t keep secrets.
5. Work with experts. Assemble a team of professional advisors to help you create a succession plan, including your CPA, attorney, banker, and financial advisor. Think of them as your succession planning advisory board who can offer an outsider’s perspective and advice based on their experience helping other family businesses succession plan.
6. Don’t forget tax and estate planning. This is easy to overlook, but doing so can be costly. Transitioning a family business to heirs can result in unexpected and expensive tax and estate planning consequences, including partial liquidation of the business to cover tax obligations. Early planning can help avoid these and other problems.
Review and Reevaluate Your Plan
Successful business owners know that things – such as their industry and marketplace – change. The same is true for families. Relationships and dynamics can change, as well. Therefore, it’s wise to regularly review your succession plan to make sure that it reflects the current situation and your current desires.
Dembo Jones professionals have worked with hundreds of family businesses in a wide variety of industries. Put our experience to work for you; we’re available to help you create the most appropriate succession plan for your business and your family.