Family business succession planning does not simply begin with a plan to move responsibilities to a new generation of leaders. Succession planning is complex, with needs unique to the family and the business itself. There are intimate concerns, histories and interests at stake that have to be wisely considered. There are goals that each family wants the new generation of family business leaders to meet. Much of the time, there are estate and inheritance interests to be carefully arranged and laid out, along with the management of disputes and legal agreements.
Family Business Survival
In general, family business succession planning tends to begin with a little apprehension. First generation business leaders can have trepidation towards not being able to transition to the next generation successfully – and it makes sense. Roughly only about a third of all American family businesses survive after moving into the second generation of leaders – and only around 12% survive into the third generation.
All of the issues mentioned above seem to work against successful business transitions, but in reality, it just takes very careful, very meticulous planning and attention to detail to ensure a successful, sustainable transition. Take a look below at a few ways family business leaders can create a feasible succession plan:
For a family business to survive, leaders need to reevaluate and redefine current goals and objectives. If there is a current family succession plan, it should be reviewed. Are the means of reaching these goals feasible? What are the steps that need to be taken to reach these goals when succession has taken place?
In addition to goals, families should revise or create a Family Vision Statement that determines further objectives. These objectives need to consider the unique, growth-centered goals of the next generation of management.
Financial goals also need to be revised or set into place here. What are the current generation’s retirement and cash flow needs? What legal processes need to be followed to ensure the needs of the current generation are adequately met? Financial concerns need to be discussed and established immediately, as unexpected events can occur at any time.
Next Generation Family Management
Establishing management for the next generation of family business leaders involves an establishment of all governance processes. First, identify the roles of each successor. Next, identify what roles all active family members will take. Which family members or members of the company will support, train and help the successor move forward?
Next, the actual succession plan must be revised or put into place. By identifying who the successors will be, family business leaders identify areas of concern, perhaps built upon relationship issues or strengths. Will the company’s succeeding owner work productively with the company’s current management? Are there family members who don’t get along? If so, is this a wise transition? Can something be done to both repair and develop their relationship for the future of the family and the business?
Business leaders cannot let family dynamics give them fear of succession planning. There are ways to move forward in an organized and successful manner.
Establish a Business/Estate Transition Plan
Estate ownership, as it involves both a family and a family business, becomes very complicated when transitions have to take place. First, after establishing how the financial needs of the current generation are going to be met, current family business owners should discuss taxation implications with a professional.
Understand what’s going to happen legally when a sale, transfer of ownership, or death takes place. Most likely, business leaders have already addressed this and have a process instituted. Like everything else, this process needs to be reviewed in order to avoid unexpected taxes as well as delays in transfer of stock.
Remember to make sure the transition plan is fair to all parties and that it reflects the values of the family and of the business. Consider all options available within the transition, such as whether it will be a purchase or a gift. Consider any financing options available, as well, and what implications financing can place on a relationship.
Will the retiring owners help the next generation finance the purchase? If so, how and within what timeline will the successor pay back the lender? With these decisions made and put into place today, both the first generation and the second generation will enter into the transition fully prepared for what lies ahead.
Establish a Timeline for Implementation
Establishing a timeline for all of the above plans is a very important step. Of course, not all timelines will be met. For example, will succession take place after the current generation has retired or after there is a death? As impersonal as this sounds, this decision needs to be clear from the beginning, simply for the sake of creating a timeline and ensuring that all involved parties follow each step in a timely manner. Financial decisions, for example, should be discussed early on, taking into account that unexpected events can easily happen. Early planning helps avoid taxation surprises, allows successors to follow through with other personal and professional goals, and gives the current family generation time to refine goals, visions and other areas of the family business succession planning process.
Early planning also helps families deal with conflicts. Family businesses suffer from personal and professional conflicts much more than non-family businesses, and for succession planning to be successful, these conflicts have to be dealt with in a wise and fruitful manner. There is a future at stake here, and for the family business to survive transitions, conflict resolution is imperative.
If you feel that your family business isn’t adequately prepared for succession planning and succession transition or if you feel that there are members of the business not ready for the transition, take a moment to let Coach Pete encourage you, a family business leader, to ask tough, important questions regarding the timeline of the succession planning process.