Succession planning in a family business is often complicated due to family, estate, and tax issues that non-family owned companies never have to deal with. In fact, around 70% of family businesses fail to make the transition to a second generation of owners and over 90% fail to make it to the third generation.
With such high odds, careful planning is crucial for any business owner who wants to transition management of his company to the next generation. However, many owners ignore the need, wait too long to address it, or do not do it well, resulting in family tensions and the loss of business talent. All family companies should have a concrete succession plan set up that addresses how the senior generation will transition out of the company and allow the next generation to assume leadership.
When considering succession planning, there are several things that are important for an owner of a family business to do.
• Put a written plan in place now. For those who plan to leave a company to the next generation only after they have died, succession planning may seem like a morbid task. But as the saying goes, “Failing to plan is planning to fail.” Putting off succession planning can risk the future of the company in the case of an unexpected death. But it also means that a transition of leadership has not been thought out.
• Clearly outline the roles that every person will play during and after the succession process is over. One of the biggest problems that occur within family businesses is differences in expectations about how much responsibility and involvement different family members will have.
• Choose a successor and train them. In families that have more than one person who could take over leadership of the business, this can be a hard task, filled with emotional repercussions. But it is important for the health of the company that the person who will one day be responsible for leading it knows how to run it.
• Make sure knowledge is being passed on now. The older generation has years of knowledge gained by experience in the industry. Be intentional about passing that knowledge on to the company’s future leaders as well as others who will be contributing to the success of the company.
• Be willing to compromise. Often, the goals and plans of different generations can differ greatly. Although it can be difficult for the older
generation to see their successors make business decisions that they don’t agree with, it can be equally difficult for the younger generation to feel constrained by the wishes of their parents and not allowed to really lead the company. For the sake of both family relations and the company, a willingness to compromise and let the next generation try things their way is essential.
• Get professional advice. Transferring ownership of a family business includes much more than handing over the office keys. Estate taxes, retirement income and buy-sell agreements are all part of the succession of a family business. To ensure that everything is done legally and that the company can financially handle the plans that are being put in place, an attorney and financial adviser should be consulted. Expert help can make sure that whatever plan is put in place is legal and feasible.
