The Complexities of Succession Planning in the Second Generation
If your family business is one of the roughly 33% of those which has survived into the second generation, it’s likely that your family business leaders understand the importance of business succession planning. But now that your business has successfully transitioned into the second generation, you may be left feeling like you are back at the starting line with regards to your succession plan and where it takes your family business from here. As we discussed in our article, Succession Planning Through the Family Business Lifecycle, the further along a family business is in its lifecycle, the more complex its structure is, rendering the succession planning process all the more complex as well.
Creating a succession plan for a second generation family business is not as simple as changing names on the previous succession plan. After all, there may be more owners, more employees, non-family employees and other factors contributing to how a new succession plan might be best developed. Therefore, as you approach your second generation succession plan, begin by conducting a thorough examination of your family dynamic, your business and its structure.
Here we will outline some of the various factors you need to consider as you develop your second generation succession plan, based on the three-circle model of family businesses (see our article, The Full Circle of Family Business Dynamics, which includes family, ownership and business.
Because the family has grown and/or become more extended as it has transitioned into the second generation, the family component of the family business is just as complex as the business and ownership components – often even more so. Now it is up to the second generation to develop strategies to manage the family dynamic. When developing your new succession plan, it is critical to consider the following within your family.
- How the family is structured
- Personal factors of each key player, including age and health, financial stability, relationships and personalities – and how these compare to those in the senior generation
- How and how well the family communicates regarding the business
- How the previous succession plan was perceived by family members
- First generation succession plan objectives
- First generation leader viewpoints and opinions that affected first succession plan
As the family business progresses through its lifecycle, ownership and owner relationships can become much more complex. The business may have begun with a single owner, but may now be controlled by multiple owners or groups. The second generation must take into account how ownership is currently structured in order to proceed with developing a new succession plan. Factors to consider include the following.
- Existing buy-sell agreements in place for the current owners
- Current owners (family, non-family and those related by marriage) and whether they hold ownership individually or through trusts, partnerships or other arrangements.
- Consider how owners may be grouped together and whether there are obvious leaders in each group.
- How the previous succession plan was executed (via formal succession plan, estate plan, etc.) and whether the distribution of ownership was similar to the distribution of daily management responsibilities
- Family relationships of the various owners
- Qualifications, goals and level of involvement of owners and of managers
- Similarities shared by various owners
Lastly, there are a number of business concerns that need to be considered as the second generation develops a business succession plan.
- Business entity structure and how tax limitations may affect the business’ ability to restructure
- Any effect the transition from first generation to second generation has had on the business
- The financial status of the company, including assets, liabilities, income, expenses, liquidity, cash flow and valuation and projections regarding each, as applicable
- Salaries of all employees along with an assessment of their market appropriateness
- Existing business goals and strategic plans
- Strengths, weaknesses and competitive threats and strategies needed to address each of these
Once the family business leaders have conducted a thorough discussion of the above, you will be better prepared to evaluate how these factors play important roles in the development of your second generation succession plan. For an additional detailed checklist, see Business Analysis Checklist. Most importantly, consult with outside experts, such as your attorney, CPA and other professionals as you undertake this most important task.
Contributing Source: “Business Succession Planning – Second Generation” Chapter 32 by Scott Carter, 2009 State Bar of Texas 33rd Annual Advanced Estate Planning & Probate Course