Succession planning for multigenerational family businesses.
Sustaining a family business over multiple generations, however, is considerably more difficult. Just 30% survive two generations, and only 12% make it through three.3 These long-standing businesses tend to share some common traits. Among them:
1. They think long-term.Family business owners generally think in terms of generations rather than quarters. Their long-term perspective can impact decision-making, from whether they choose to rent or own facilities, to how they structure employee compensation and retirement packages. Their desire to pass the company on to future generations also makes them more likely to embrace strategies that put customers and employees first and emphasize social responsibility.
2. They begin succession planning early.One reason only 30% of family-owned businesses survive two generations is because nearly half have no succession plan in place.2 Those that engage in long-term planning understand that each new generation of leaders must have the commitment, capabilities and drive needed for ongoing success.
For multi-generational businesses, it’s wise to put a succession plan in place as many as 10 years before the current generation of leaders intends to implement it. That allows the transition to be completed in steps and helps to minimize the disruption of an abrupt change. Family businesses that create succession plans early can also use the process to manage expectations among family members. Younger generations who understand their role in the company’s future can then prepare accordingly.
3. They seek advice from outside the family.Completing a succession plan usually only happens once in an owner’s lifetime. To meet the needs of both the current and future generations, it helps to have trusted, independent advisors who don’t have a personal stake in the outcome. This team—including, at minimum, a financial planner, banker, CPA and an attorney—can help all parties understand and navigate the legal, financial and tax implications of the tough decisions they will be asked to make.
Some family businesses also engage a human capital consultant to assess current employee skillsets and leadership capabilities and suggest appropriate training, roles and compensation for the next generation of leaders. An independent consultant may also be helpful in identifying skills gaps that non-family members may need to fill.
4. They know how to resolve family conflicts.Conflicts can arise when family values are challenged. Disputes can grow especially charged when the priorities of different generations conflict. Senior family members tend to prefer security as they look toward retirement, while younger generations may be seeking to make their mark on the business with new ideas and direction. A review of shared family values can be useful in reminding everyone why the family is in business together and how family ownership makes the business stronger. To resolve conflicts, many bring in outside facilitators who can guide them in setting priorities and negotiating solutions that align with the company’s values and the varying goals of each generation.
5. They know the current market value of their business.Retaining a business valuation firm or investment banker to track a family-owned company’s market value over time can be a worthwhile investment. This data may not only incentivize the next generation of leaders, it can also help guide investments in new technologies, expansion into new markets and other business decisions.
If current owners intend to sell or gift the business to a new generation and wish to minimize taxes, they will likely want the value to be as low as possible. Outside advisors can be helpful in this area, keeping owners abreast of current tax law and offering strategies that create win-win transfers. Documented proof of the growing market value of the business can also be helpful if the business is eventually sold to an outside buyer.
6. They have a Plan B and C.Circumstances change. People change. Family members once pegged for leadership roles may decide to opt out. The sudden death or disability of an owner can alter the transition timeline overnight. In some cases, Plan B or C may mean selling to non-family member employees, creating an Employee Stock Ownership Plan or finding a third-party buyer. Each has advantages and disadvantages that outside advisors can help explain.
In other words, expect a succession plan to evolve over time and be prepared to update it periodically as the situation warrants. Include contingency arrangements for emergencies and unknowns. Being proactive now will make it easier to make informed decisions later. Without a plan, leaders risk acting on impulsive decisions at the times they can least afford it.
7. They put everything in writing.Clear communication not only helps set expectations, it can also minimize conflict in the aftermath of a crisis. Job descriptions, compensation packages, business plans, estate planning documents—anything that can create a smoother transition—should be shared and discussed with both junior and senior family members. Transparency matters.
The bottom line.Succession planning is a critical task that many family business owners are reluctant to begin. Even after it is complete, changes in everything from career goals to tax laws can throw a plan off course. Companies that are intentional in the way they nurture their heirs can prepare them for an eventual ownership of the business. An advisory team can help keep everyone accountable, bring alternatives to the table, and help create a transition that meets a family’s goals.
- What are some effective ways to grow a small business quickly.
- How can my business gain a competitive advantage?