HOW TO: Succession Planning in a Family-owned Business
Editorial Assistant- Tampa Bay Business Journal
Establishing a business succession plan is important for any company, but for family owned businesses it’s an absolute necessity.
Often times, family businesses have the most to lose when the patriarch or matriarch steps down, and no plan is in place.
“Family businesses that fail to [have a plan] abdicate control of the business,” said Brian Sparks, a shareholder with Hill Ward Henderson in Tampa, Fla., who specializes in estate planning.
According to Gray Plant Mooty, a law firm in Minneapolis, there are 5.5 million family-owned businesses in the U.S., and they generate 57 percent of the nation’s gross domestic product.
“The most important component in the succession plan is that it secures the future of private enterprise,” said Anne Hargrave, a consultant with The Family Business Consulting Group located in Chicago. “There (are) a lot of threats to the success of these businesses.”
About 30 percent of family-owned businesses survive the transition from the first generation to the second, and only 12 percent survive to the third, according to Gray Plant Mooty’s website.
The issues family owned businesses face is twofold, first with the family itself.
“There are a lot of family variables that needs to be considered,” Sparks said.
For example, which family member will step into the main leadership role, which sibling, which child, or will there be a partnership?
“The family dynamic is often the most challenging,” Sparks said.
The second issue that needs to be considered is taxes and fees associated with handing over the business, particularly if it deals with a death, including gift taxes or estate taxes.
“There’s typically a large cost if there is no plan,” said David Felman, also a shareholder with Hill Ward Henderson.
If the company is in a state of flux, sometimes customers will leave during the times of uncertainty.
There is a difference between larger companies and mid-sized to small companies.
Bigger businesses have the convenience of having more executives prepared and ready to step in to fill top leadership roles, while smaller businesses usually don’t.
Chief executives at smaller businesses typically play the largest role in company, and have a greater portion of the responsibility, according to Felman.
Leaders must have self-awareness and forethought when it comes to the longevity of the company.
“Often time the key or the catalyst, when it happens successfully, is when the leader of the business is the one to initiate [the planning process],” Sparks said. “Because underlings sometime are hesitant to bring it up.”
It could be said that the greatest legacy of an effective leader, is to have great people on staff that can take over when he or she is gone and the self-awareness to be prepared for it to happen someday.
“It takes some courage,” said Felman.
Another important part of the succession-planning process is periodically evaluating the plan and changing it accordingly.
“What presents a problem for businesses and the family, is if they don’t manage the plan,” Hargrave said.
Businesses should think about what roles, successors and, or, family members play in future generations.
“As you go from one generation to the next, think about how future family members will work together.”
Succession plans should also be well thought out and specific.
“It’s important to be really clear about what that ownership means,” Hargrave said.
Family businesses with no immediate family members willing or capable of stepping can also look outside for replacements.
Charles King vice chairman of CT Partners an executive search firm in New York, says choosing someone who fits into the company culture is very important.
When looking at someone from the outside, he refers to the three “Cs” –confidence, commitment and chemistry.
“Strong leadership skills and abilities are certainly paramount,” King said.
In addition to leadership skills, industry experience, unquestionable ethics, and if it’s a public company, someone who understand Wall Street and its analysts.
CEOs are often not interchangeable, and some may only be looking to obtain the title.
“You want someone who demonstrates a real intellectual curiosity about the business,” King said. “And make sure the person coming in is doing it for the right reasons.”
It’s never too early to begin the process. For any family business owner who wishes to see the vision and brand they created endure, having a succession plan could be the best investment to make.
“We’re all human beings therefore we’re all mortal,” Sparks said.
Common components that go into succession planning
- Educate children early on about the family business to create an attitude of ownership.
- Create a personal development plan for potential successors to be sure they are taking steps to be successful in the role once they step into it.
- Have leadership and mentoring programs or opportunities for potential successors, family or otherwise.
- Have a game plan in case the business gets handed over to a team of successors, including groups of siblings or groups of cousins.
- Have a clear rationale for the succession plan and make it fair and transparent. This can help eliminate the anxiety and bitterness that sometimes exists among the next generation.
Source: Tampa Bay Business Journal