Family businesses make up a huge portion of businesses in the United States. According to a 2016 survey, family businesses account for 50% of U.S. GDP, and 35% of Fortune 500 companies are family businesses. What’s more, the survey found that in 2016 family businesses accounted for roughly 60% of jobs in America. Clearly, family businesses have a history of success in America. Yet passing it down to the next generation might not always be as successful. That’s why today we’ll talk about the ins and outs of business and family succession planning. And the main takeaway is: it’s never too early to start planning.
Challenges with Business and Family succession planning
Running a family business is not always (or even usually) a smooth endeavor. Many family businesses experience great success under the leadership of their founding generation. Yet, when it comes time to transfer power, they falter. According to the same survey, only 30% of family businesses make it through the second generation’s ownership and leadership. In addition, only a startling 12% make it through the third generation.
And why is this the case? Many indicators point towards the fact that succession planning is not typically found among the strengths of family owned businesses. A recent survey by the National Bureau of Economic Research’s Family Business Alliance found that only 15% of family businesses have anything even resembling a succession plan in place.
This number is quite staggering. For family businesses especially, a good succession plan can be key in sorting out the most effective way to transition leadership and ownership of the business.
What is Business Succession Planning?
Succession planning refers to the (often years-long) process of developing a written plan for the transition of leadership and ownership in a business following the owner stepping down.
On paper, of course, this sounds simple enough.
But take into account:
- complex family dynamics and relationships
- the attachment that the senior generation often has to their business
This would show that undergoing the succession planning process can turn out to be quite challenging for many family businesses.
It is unfortunately commonplace that family businesses fail to plan appropriately for succession. Here some reasons that the succession planning process gets neglected:
Things to Avoid for Business and Family Succession Planning
As stated above, family relationships are a major factor in the lack of succession planning.
Having no clear successor
This can mean a plethora of things:
- the founder assumes that their first-born son will take over the business without considering his aptitude or interest;
- there is no clear successor in the family and therefore planning for succession is too daunting;
- the business leader is quite attached to the business and unwilling to plan for succession, etc.
Be wary of falling into this last trap in particular. A founder’s reluctance to let go of his or her business can be the cause of significant friction. This can easily be interpreted as a founder’s lack of trust in his or her successor in dealing with stakeholders, employees and clients alike.
Needless to say, this can adversely affect many parties involved and negatively affect plans for succession.
Procrastination
Another common reason family businesses don’t often plan for succession is that they simply cannot find the time to do so. Family business leaders and owners often devote incredible amounts of time to running their businesses. As such, they are so caught up in the day-to-day operations that they aren’t able to set aside time to plan for the future.
The succession planning process can also be very daunting for business owners. It can be very hard to know where to start and how to go about developing a succession plan. And this is even more true if there are complex family dynamics at play.
And then there is the proverbial issue of maybe ‘it’s too early’ to start planning. Putting it off again and again because it’s so far in the future is not good. It can result in a dangerous cycle wherein a succession plan never actually happens.
Even if you anticipate a transition in power and leadership to be 20 years down the road, it is always wise to construct a plan in case of unanticipated or emergency circumstances.
If you are involved in a family business and are experiencing some of these issues, don’t worry – you are most certainly not alone. Listed below, we have developed a few pointers and pieces of advice to take into consideration if you are starting to try and wrap your mind around the succession planning process.
And of course, we are more than happy to consult and help you develop an individualized plan for your business’ succession.
Tips for Business and Family Succession Planning
Plan, plan, plan
Set aside time – a lot of time – for the succession planning process. Successful succession plans are usually started at least 5-10 years before the actual ownership and leadership transitions happen. Planning this far in advance will give you ample time to take into consideration the goals and objectives of your business’ leadership, other family members, stakeholders, clients, and the business itself.
The company vision
On that note, it is extremely important to consider many different stakeholder perspectives when creating a succession plan. You always want to start with the owner’s vision for the future of the company. However, in family owned businesses it is also imperative to take into account the family’s vision. Sometimes this can get lost in succession planning for businesses with highly engaged and visionary owners.
Once you’ve solidified an idea of the family’s strategy and the business’ strategy for moving forward with a succession plan, you want to make sure to align the two plans.
Choosing the right successor
Another integral part of good business succession planning is carefully considering and preparing the successor(s).
Too often, family businesses make a default decision regarding their successors, without really taking into account the strengths, weaknesses, and willingness of various family members.
First, ensure that family members under consideration actually want to run the family business. Next, consider the skill sets of family members under consideration.
It can be hard to come to the realization that your children may not possess the necessary skills to run the family business. So if this is the case, you would not be doing your business’s legacy any justice by refusing to acknowledge it. It may be necessary to think a little outside of the immediate box when choosing a successor in the family. Hence, maybe a cousin, niece or nephew could be the best option to lead your business to future success.
Then, mentoring your successor
After identifying viable options for a successor, it is important to foster that relationship. This includes giving this person all the tools to ensure they continue your business’s vitality.
For example, it is recommended for your successor to spend some time outside of the family business. This could mean gaining experience through schooling or working at different businesses.
Employing people with different experiences and knowledge will prove to be extremely valuable in the long run. Don’t just rely on the fact that your successor is your son or daughter. Rather, it is more important that they earn their position as leader/owner of the business.
One way to help with this is to start your successor out in the company in a pre-existing role. Giving them a position that already has set duties and salary will give more structure to their role. This will allow them to understand first-hand how the business operates.
Everything to consider
We recognize that this can all be very complex to deal with. It is a difficult process to carry out without outside help. Lawyers, accountants, and financial advisers are frequently called upon to help create family business succession plans.
Seeking advice from objective, non-family members who are experts in their field will make a world of difference for structuring an effective, well thought out plan. And this plan must take into consideration tax implications of transferring the business, estate planning, business shares and more.
For additional advice for life after selling or passing on your business, read this helpful post.
As experienced and successful leaders in the wealth management field, we are well-equipped to help you on your journey to creating a plan for transferring the ownership and leadership of your business, whenever that may be. We are happy to help with financial advisor services (not legal, accounting, nor taxes though) for this transition, with the goal of business success.
We certainly believe that being confident in your succession plan is a worthwhile process. Family businesses truly help to make up the backbone of American businesses.
We Can Help
At Saddock Wealth, we bring years of wealth management experience to the table and can help guide you toward financial prosperity. Make sure your wealth is in the right hands and ready to grow in 2020. Schedule a meeting here, and we’ll discuss your best options.