Family-owned businesses are the backbone of the American economy. However, despite the job security and family legacy potential many of these businesses represent for the families that own them, the importance of careful succession planning is often overlooked. Indeed, only about 30% of family businesses survive into the second generation, according to the Family Business Institute.
While transitioning ownership and control can be difficult for any business owner, the leaders of family businesses are typically faced with the added challenge of managing family relationships, while preserving the culture and standards they have worked hard to establish. If you are a business owner hoping to pass your company on to the next generation, a few key considerations can help you successfully navigate the transition while maintaining family harmony.
Your family may have several capable members who are willing and able to take over the family business. On the other hand, not all children have the interest or skill level to run a successful company. When creating your succession plan, it is important to decide whether treating all of your family members equally is best for the business over the long run.
Family businesses that operate as a meritocracy are typically more successful than those that promote based on family relationships alone. Defining and documenting what you expect of your children and the future of the company is an important first step in succession planning. Perhaps they require additional education or training before they are ready to lead. Or, you may find that retaining key employees or looking outside the family for additional expertise will help smooth the transition. Whatever the case may be, understanding each family member’s strengths and weaknesses can help you delegate and separate responsibilities most effectively.
To create an enduring business, your vision should align with the plans your children have for the company. The long-term success of a family-run business often requires a careful balance between adhering to tradition and embracing change. Therefore, it is important to discuss plans with your children for keeping the business modern without deviating significantly from the company’s and family’s core values.
This can often be achieved by involving family members in the day-to-day business operations well before you plan to transition leadership. Additionally, establishing a control process for major business decisions can help avoid disagreements and deviations from strategy down the road. Open communication and thoughtful planning can help ensure that all family members have similar goals and aspirations for the business.
Of course, no succession plan is complete without determining the best way to transition ownership. Regardless of what you decide, a comprehensive plan should be designed to serve the interests of all parties—including your estate. While there is no single transition plan that is right for all families, the most effective plans focus on maintaining family dynamics while allowing the family members most active in the business to continue in their roles without unnecessary interference from others.
Several techniques are available to move your family business into the hands of the next generation. These include setting up a grantor retained annuity trust, transferring your business shares, structuring an installment sale to one or more children or to a grantor trust or using life insurance as a planning tool. Whichever plans you make, your family must have the willingness and capacity to make them function, which may require education, skill development and ongoing conversation.
Giving up and passing on a family business is a major, life-changing event with a host of complex issues and potentially difficult decisions. While it may result in family strife, if done well through proper planning, it also has the potential to be a golden opportunity to realize business, family, legacy and philanthropic goals after years of hard work and sacrifice.