Introduction
Many family-owned businesses don’t make it past the second generation, and only a few get to the third. The primary reason is the lack of family business succession planning.
If you own a family business, you may be wondering how to prepare the next generation to take over. However, in this article, we’ll share insights about family business succession planning. Additionally, you’ll learn how to create a plan that’ll be sustainable in your absence.
Succession in most family-owned businesses operates around the assumption that the next generation can successfully run the company as the predecessor did. However, this idea fails to account for the fact that each new generation has different leadership skills, abilities, and interests.
Also, there’s the factor of the business context that shifts or evolves, which businesses fail to consider. Here is where family business succession planning becomes relevant.
What is Family Business Succession Planning?
Family business succession planning is a process where a family-owned business devises strategies to hand over the reins to a next-generation family member. A succession plan is why multi-generational family businesses have a firm staying power. From one generation to another, they keep upholding the organization’s vision and founding principles.
Therefore, heads of family businesses need to start planning for their successor as soon as possible. The reason is that it may take years to groom a strong and capable leader. Also, the more time business owners spend executing a succession plan, the smoother the transitioning process will be.
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The Creation of a Family Business Succession Plan
Michael Evans of the Newport Board Group recommends five significant steps that family-owned businesses should follow, to create a viable succession plan. These steps also comprise several mini-steps, and they include:
Establish Goals and Objectives
Leaders of family businesses should first identify clearly the visions, goals, and objectives of the organization. This step also addresses the importance of continued family involvement in leadership and the option of bringing in external professional management.
Additionally, the management team should consider retirement goals and the cash flow needs of exiting family members. Likewise, they should take into account the personal and business goals for the incoming generation.
Establish a Decision-making Process
This step identifies and establishes, in a written document, the process for involving family members in the firm’s decision-making. It also lays out procedures for resolving disputes.
Establish the Succession Plan
In creating the succession plan, management should identify successors- both managers of the company and owners of the business. They should also define each family member’s role, either active or non-active, and any additional support the successors may require.
Create a Business and Owner Estate Plan
This phase addresses any tax implications to the owner or business upon transfer of ownership, death, or divorce. It also reviews the owner’s estate planning strategies to minimize taxes and avoid delays in stock transfers. Furthermore, it should create a buy or sell agreement that is fair, reflective of the business value, and tax strategies.
Create a Transition Plan
The business owner should consider the options of an outright purchase versus a gift/inheritance, or the possibility of combining both options. This step also considers external financing or self-financing from the retiring owners in case of a sale. Finally, the business owners should establish a timeline for implementing the succession plan.
Family Business Succession Planning Template
Family business succession planning may seem difficult to carry out. Therefore, most family-led organizations employ the help of professionals like lawyers and accountants when crafting a plan.
However, if you’d like an easy way to go through the process yourself, you can use a planning template. There are several of these templates online, either for free or a small fee. A template makes the planning process a breeze, and also gives the succession plan a professional look.
Family Business Succession Planning Model
A succession planning model helps illustrate the family’s interaction on management and ownership of the family business. A simplified model, called the Three Circle Model, consists of the ownership circle, the management circle, and the family circle.
These circles represent the interaction/impact that each component has on the family and the management of the business. It also illustrates the relationship between each element and the other. Furthermore, it shows how they meet in the middle, indicating a mix of family, ownership, and management at some point in the business.
From the circle, it’s easy to see how the three components’ interaction can create challenges and provide unique opportunities. Therefore, the family business’s ability to transfer ownership to the next generation depends on the management of the family component.
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Sustainability in Family Business Succession Planning
If you run a family business, you’ll want to give your company the best chance at a transition. Most importantly, you’ll want to ensure that the business thrives for several generations after your exit. To ensure the sustainability of a succession plan, consider these tips.
Plan Early
Sustaining a succession plan begins with the timing of crafting the plan. As a rule of thumb, you should prepare a succession plan at least ten years ahead. The earlier you plan, the better your chance to mentor the successor and the smoother the transition process.
Involve Family Members
The best way to avoid discord among family members is to involve them in the planning process. It also helps you identify which family member wants to be involved in the business or intends to pursue other careers.
Be Realistic About Picking a Successor
While it may be your desire to leave the business to your first-born, he/she may not have the necessary managerial skills. So, it’s best to do an honest assessment of which family member is capable before picking a successor.
Train Your Successor
A succession plan can’t be sustainable without training the next generation to take over the business. Consider dedicating some years to work with your successor while teaching him/her the required business skills.
What Does Succession Planning for a Family Business Entail?
A business technique used by organizations to transfer leadership roles to another person or group of employees is known as succession planning. Planning for succession makes sure that firms keep operating efficiently and without hiccups even if key personnel leave for better opportunities, retire, or pass away.
A Family Business Is Inherited by Who?
In the absence of a well-designed business succession plan, ownership of the company is determined by the owner’s estate plan, which frequently divides the estate (including the business) equally among all children. Owners need to carefully consider how to pass the company on to the next generation.
What Is the Structure and Succession of a Family Business?
The process of transferring management and ownership of a family firm to the following generation of family members is known as “family business succession”. Family assets could be included in the transition as well.
After the Death of a Corporate Patriarch, Who Takes Over the Business?
If a company is a sole proprietorship, it shuts down after the owner passes away. When a business owner passes away, the debt and assets become a part of their personal property. In the case of corporations or S corporations, the estate takes over ownership of the company.
If a Business Owner Passes Away, Who Takes Over?
If a business owner passes away without making arrangements for their ownership interest in the company, it will probably be transferred to their estate. The family then has two choices regarding what to do: The dead owner’s status as a partner could be assumed by a family member.
The Bottom Line
Irrespective of how successful a family-owned business becomes, leadership roles must change someday. This event may be voluntary, as in the case of retirement or involuntary, such as death or incapacitation. However, a succession plan ensures that the business will continuously operate with no disruptions and minimize tax implications for all parties.
Business leaders should start building their exit strategy right into their business plan. Firstly, long-term succession planning helps businesses determine how well the successor can execute management tasks and gives them time to learn. Lastly, it helps to facilitate an orderly transition of management and ownership.
