Family Business Matters: Succession Planning

Who's in Charge?

Most family businesses have at least two generations working in the business. Oftentimes, it is the parents, brothers and/or sisters on the one hand and children, siblings, cousins on the other. Sometimes, family businesses have three or four generations actively working in the business. The involvement of multiple generations and family relationships makes the family business a unique and oftentimes difficult asset to protect both now and in the future. Every business, whether family owned and operated, or privately held with one or more owners eventually is transferred by one means or another to new owners, managers, or third parties. Whether large or small, the family businesses' chances of continued success depends on a "plan".

Does Your Business Have a Formal Succession Plan?

When I meet with new business clients in my practice, I routinely ask the question whether the client has a succession plan. The responses vary but usually the following statements are representative of most of the answers I receive in response to my question. These answers include the following:

  • "Yes, and we're constantly updating it." (rarely ever the answer)
  • "Yes, but we haven't looked at it recently." (more often than the first response but still very rare)
  • "No, we don't have anything formal but we do talk about it." (sometimes the response)
  • "No, we haven't considered it and we don't like to talk about it." (most of the time)

How to Decide Who's Next in Line to Run the Family Business

It's hard for anyone to consider what would happen if the unthinkable were to occur and they or a family member were to suffer from a serious illness, injury, or even death, but for business owners, it's crucial. The last thing a family needs in a time of crisis is the added anxiety and worry of what will happen to the family business and its income when something bad happens. As a result, business owners should consider potential successors, examine their skills and look into the legal issues involved with the process of succession planning. The most practical first step in any succession plan, whether or not the business is family owned, is to ask and honestly answer the following two questions:

  1. Is there a family member(s) or employee(s) that wants to continue the business?
  2. Is that family member(s) or employee(s) capable of continuing to manage and run the business in the future?

An honest assessment of these two questions is a necessary first step in a succession plan for any business. If a business owner, after an honest assessment of the individuals involved in his or her business cannot answer both of the aforementioned questions in the affirmative, then perhaps the best succession plan may be a plan to sell the business to a third party.

Why Do Business Owners Resist Succession Planning?

Succession planning can be hard, emotional and lead to acrimony within a family. In addition, many small business owners fail to plan for what will happen to their business if they are not able to continue to work due to work or illness based on avoidance. The business owner simply does not like to think about it. In other situations, some business owners do not know about succession planning, while others may think they are too young to worry about death or incapacity. It is natural to want to avoid thinking about these issues, but the age of the business owner is irrelevant to the need to create a business succession plan, as unforeseen events such as death or disability can occur at any time to anyone.

When Should You Plan?

Business owners should begin succession planning early in order to ensure the continuity of management, good will, operations and their client base in the event of the owner's departure. In the case of a small family-owned businesses, it is often the primary asset so you owe it to your family to focus on these issues in advance.

The challenge for many small family-owned businesses in succession planning lies in choosing a successor and deciding how the business will be governed when you are not there. Non family-owned businesses can continue without the owner, as they typically have the diversity of management and ownership. Family-owned businesses face a different reality, as they tend to have their entire operation, clients and goodwill, linked to one person or very few persons within the same family. The tough decision for the small family-owned business owner is which relative - sibling, child, niece, nephew, or combination thereof - will lead the business and how will future decisions be made about the overall direction of the business.

Any business owner embarking on this process of succession planning should identify one or more potential successors who have demonstrated a passion for the business and are interested in running the business. The last person you want running the business that you worked hard to create is someone who lacks a passion for the business and product or service. Remember, your clients will notice bad business choices.

Second, it is important to take an inventory of the potential successor's skills that are relevant to continue the success of the business. Which relative or child treats you the best should not be a factor in making this decision. Owners of small family-owned businesses going through the succession process should make every attempt to include the entire family in the discussion to avoid or reduce familial discord.

Another reason to begin the succession process early is to have enough time to cultivate, train and select the perfect successor for your business. Depending on the size of a business, you may want to hire a consultant or consulting firm to assist with the creation and implementation of a training program for a potential successor.

Conclusion

A colleague of mine once said, "Do not let perfection stand in the way of the perfectly adequate." Some formal planning is better than none. The process of planning for a succession of the family or small business is not easy but absolutely necessary if the business is to survive after the current owners/management cease their involvement. By utilizing the services of qualified consultants, legal and tax advisors, the process of planning for the succession of the family or small closely-held business can be a manageable and rewarding process.

Please let us know if you have any questions.

Dan A. Penning