Succession planning is important in any business, but it’s sometimes overlooked in family-owned operations. This is a big mistake. There are numerous former family-run companies that no longer exist due to poor or no succession plan.
The plan needs to be well thought out and discussed with everyone affected. Don’t just assume that a family member or members will want to carry on the family business. Even if they say they will take over, they may not have the true desire required to continue a successful operation.
These family dynamics often play a major role in the success or failure of a transition. Only a very small number of family businesses succeed in transfers to the second generation and even fewer make it to the third generation.
A question that needs to be settled in the case of multiple potential successors (for example, more than one member) is: What responsibilities will each person have upon succession? It’s important that the details be worked out early, because in the case of an unexpected death or disability, succession might occur sooner than planned.
You also need to address the involvement of the next generation. In some situations, the retiring family elder has adult grandchildren — some who may already be working in the business.
Sometimes, as planned retirement nears, elder family members don’t want to let go. This can cause resentment on both sides. Naturally, the elder family members want to see the business they built (or took over, if already a second-generation business) continue to succeed as it did under their leadership. They can be concerned that the firm won’t flourish without their direction.
The planning involves mapping out four distinct strategies in this order:
- A business plan that sets out the founders’ original vision, mission and goals and gives other family members a clear picture of what the future should entail.
- A family plan aimed at avoiding sibling rivalries and management-control issues. Here, you address compensation policies, management expectations, performance measures, job descriptions and codes of conduct within the business. You should also outline who is entitled to join the business and how to treat family members who aren’t involved with the company.
- An estate/retirement plan that incorporates a business valuation, how to finance the buyout, distribute retirement funds and calculate estate taxes. Another critical issue here is the inheritance of corporate and non-corporate assets.
- A succession plan that sets the date for retirement, establishes a timetable for training new management, outlines any role the founders will continue to play and arranges for the management of cash flow.
It’s never too soon to start: Succession planning helps you balance both personal and business interests and helps ensure that your family-run business gets through the transition successfully. With the help of your financial advisor, a solid succession plan will alleviate many issues in the future.