Saturday, September 21, 2019
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Succession Planning Through the Family Business Lifecycle

Family businesses that plan together stay together. And those that don’t plan are more likely to be one of the 70% of family businesses that don’t survive the transition to its second generation. So in this way, you could say that succession planning is success planning. But it is important to consider the stage of business your organization is in to properly devise the right kind of plan.

What stage your business is currently in depends on a variety of factors, ranging from ownership structure to the age of the business.  Ivan Lansberg, in his book Succeeding Generations, outlines three fundamental forms of family business structure:

Business Form

Ownership

Ownership Characteristics

Implications on Succession Planning

Controlling Owner

Often the first stage of ownership. A single owner who makes all major decisions for the family business.

Often the business founder with a strong personality. If there is a board of directors, it often simply follows the wishes of the owner.

Succession planning can be difficult because the owner is reluctant to give up control.

Sibling Partnership

Often the stage of ownership as the business matures into the late first generation or second generation. Close relatives jointly own the business in roughly equal shares. Leadership may be shared or one member may be singled out as the leader.

Family members are guided by the principle that they are accountable to the other owners.

Special consideration must be given to the form of leadership devised by the partnership and how the hierarchy is defined.

Cousin Consortium

Often the stage of ownership developed as the business matures through several transitions. Ownership is distributed among members of an extended family through multiple generations.

Often a more mature business that has survived into the second generation, thereby dispersing ownership. The creation of a hierarchy and family dynamic management in this form can be very difficult.

Those members who are most interested and invested in the business buy out lesser involved members and implement formal forms of succession planning. This type of business is the most likely to have independent boards of directors and non-family leaders.

Though the three stages are very different, they are typically representative of how a family business evolves over its lifecycle, beginning with a controlling owner, moving to a sibling partnership and then to a cousin consortium. How you plan for ownership transition in one stage is vastly different from how you should plan in another stage. Therefore, as the family business evolves and grows, succession plans must too evolve to fit the current stage of the business. Each time a family business undergoes a significant transition in ownership, the family business’s succession plan must be redeveloped to customize it to the new, current conditions and culture.

Furthermore, family business authority and author John L. Ward explains that succession planning for family businesses is more complex than succession planning for other kinds of businesses because family businesses must engage in four separate but interrelated kinds of planning:

  1. Business strategy planning: Developing strategies about the direction of the business.
  2. Leadership and ownership succession planning: Cultivating the next generation of leaders for the business starts with developing an organizational structure and training strategies.
  3. Estate and personal financial planning for family members: Sometimes overlooked, this planning focuses on building liquidity and assets outside of the business so that the business can be successfully transitioned as the senior generation enters retirement.
  4. Family continuity planning: At the center of all planning, the family must develop a set of ideals or guiding principles that put the business into the context of how it works within the greater good of the family.
One of the important insights that Ward shares is that family businesses must respect the fact that creating a successful transition to the next generation is especially difficult – but when family businesses are equipped with this knowledge, they can take succession planning seriously enough to overcome the inherent challenges. Additionally, commitment is absolutely essential for the survival of the family business as it transitions from one stage to the next.

Sources: John L. Ward, Perpetuating the family business: 50 lessons learned from long-lasting, successful families in business, Palgrave Macmillan, May 7, 2004; Ivan Lansberg, Succeeding Generations: Realizing the Dream of Families in Business, Harvard Business School Press, 1999, trustandestates.com: “Succession Planning” by David Thayne Leibell.

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