Family Succession Planning for Business
According to a recent study by Thompson Law, a vast majority of small business owners and larger corporate owners intend to pass the family business on to their children or other family members, but less than 30% have a succession plan. The Family Planning Institute further supports this report by citing that while 88% of business owners plan to have a family member running the business five years past their exit, that a mere 30% survive into the second generation, 12% into the third generation and a scant 3% into the fourth generation. These numbers show that there is a major disconnect between the optimistic belief of family owners and the stark reality of how many businesses really stay “in the family.” Let’s look at the problematic issues in succession planning as well as some tips to make a transition as smooth as possible.
Issues in Family Succession – Family businesses have several issues that work against the successful continuation of the business. These include:
- Alignment of family interests – An extremely common problem that rears its ugly head during turnover from one generation to another is the alignment in interests of one generation to another. One family member is looking ahead to retirement and maintaining his retirement income through the company while the person taking charge has a completely different set of ideas and goals that may not match the former owner. This can make for a sticky turnover.
- Family Disputes – Business goals and interests can be one problem but complicated family dynamics can be an even bigger problem. These issues can become even more complicated if there is a divorce or death that causes emotions to become a factor.
- Financial Issues – Buyouts can become financially problematic when looking at the balance sheet only. According to Forbes Online the true value of a business should probably be based on an earnings capitalization model, a concept unfamiliar to many smaller family companies.
Tips to Make Transition and Family Succession Easier
- Establish a Timeline – It is hard to get a successor without a target transition date in mind. Plan well in advance when at all possible to prepare the team to the event. Setting clear goals and milestones, and working backwards from there allows you to break things up into manageable steps, and enables you to have a more effective plan.
- Create a Succession Plan – This should include deciding on a successor, deciding on active and non-active roles for family members, and identifying additional family support where needed. This should be done as openly as possible and with the assistance of a specialized attorney in Business and Family Succession Law.
- Address Financial Issues – Examine tax issues, transfer of ownership, written agreements and a summary of the value of the company.
- Create a Detailed Transition Plan – Consider things like training your successor, introducing the team, and a smooth exit strategy for the “old” team.