Succession planning, identifying leaders to take over crucial roles when older company leaders leave, is vital to any business, but especially important within a family-run business. Overall, a family business is a crucial element to the US economy. SCORE states that family businesses employ 60 percent of the US workforce and create 78 percent of all new jobs. But surviving a generational transition is a challenge. Only 30 percent of family businesses successfully pass the company to the second generation, and only 13 percent of companies remain in the family for over 60 years. Succession planning is a key element to the success of any family business, and it’s important to understand the nuances of cross-generational leadership transitions. There are four important ways succession planning differs in a family business.
1. Misalignment of Long-Term Company Goals
During succession planning in family business, different family members can have different visions. For instance, while some members might want to sustain the company for future generations, the younger generation may have no interest in being involved in the business. Additionally, when faced with challenging decisions like whether to sell the company or stick it out, only half the family may want to cash out. Different generations can also have different expansion plans, with the first generations wanting to re-focus on traditional business operations while the second wants to pivot towards new industries.
Pressure to carry the family business forward and a high degree of sentimentality put extra strain on the succession planning process. Whoever is in charge will ultimately be responsible for making these long-term company decisions. But it's wise to have early and honest conversations about the future business prospects if the outcome could impact family relationships. Advisory boards can also release tension between family and help make clear-headed decisions about what's best for the business.
2. Pressure to Staff Family Members in Key Roles
Just because someone is part of the family, it doesn't mean they are the best person for the role. A level of entitlement, especially between the first and second generation, can arise when selecting key company roles. Your goal is to avoid backlash from family and also choose the best candidate for the position. A company should develop internal training programs, educational standards and results-based qualifications for candidates to be considered for leadership positions. With clear-cut systems, staffing key roles become about being qualified, not just being part of the family.
3. Pricing Business in a Family-to-Family Business Sale
Part of a family business succession plan may be the sale of the company from one family member to another. A family-to-family business sale offers many options, such as choosing a full versus discounted sale price, making installment payments, or even gifting a business. These options provide family members with unique opportunities to structure a sale that may way work best for the business and the family. However, be sure to address the pros and cons to these strategies with a lawyer and financial advisor before finalizing the sale.
4. The Need to Plan for Inheritance Tax
Another essential element of the family succession process is to have a plan for inheritance tax. Otherwise, any assets passed to family members after a person’s death may end up being heavily taxed. However, a smart succession plan can utilize different financial vehicles such as trusts, Family Limited Partnerships and annual gift giving to cut down on the inheritance tax burden.
Prepare for Your Family’s Future
If you operate a family business, it's important to address the nuances of family succession planning proactively. Find lawyers and financial advisors that specialize in family business to offer sound advice. There are also university-based family centers or online resources like Fambiz.com, both of which can provide valuable support.
Family business succession planning, or lack thereof, will have a direct impact on your family. So start early, educate yourself and make a plan for your family's future.
For more on family business planning, watch a webinar on how C.O. Bigelow maintained family ownership and balanced a rich tradition with the requirements of modern business.