Family Business Succession: Surviving the Transition

Did you know that as a business owner, there is only about a 40% chance your business will survive the transition from the first to the second generation? If you’ve made it that far, prepare yourself, because the road ahead is rough. According to the Family Business Institute, only about 12% of businesses are passed on to the third generation successfully and beyond that it decreases to about 3%. In my career, I’ve encountered countless business owners who have failed to prepare the next generation properly or to establish a solid succession plan to avoid catastrophe. I hope this will help you think about the aspects of life that you may be putting on hold because you are so busy trying to live in the moment or run your business. While this article won’t be able to cover all of the things you should consider regarding proper business succession or transition planning, hopefully it will spark some thoughts and nudge you in the right direction. Below are a few things to consider:

Plans to Retire –  I know this sounds odd, but most business owners feel as though they will run the business forever and never retire. I’ve seen too many business owners hold on for far too long, and when the unthinkable happens, the next generation isn’t properly trained to handle the affairs of the family business or step into that leadership role (assuming your children are interested in taking over). I admire those who have such passion and dedication, but I do encourage you to begin the transition years before you actually plan to retire. This allows you to continue being involved in the day-to-day, providing oversight, and allowing your children to step into their prospective roles. If your company has a board, you can always continue to contribute as a board member once you feel comfortable doing so.

Family Meetings – This is an important element of planning, whether a family business is involved or general wealth that is being passed down. The first few meetings can often be awkward, but over time and with structure, the meetings become more valuable. In the early stages, the meetings can be devoted to simply educating the family on the history of the business so they can see the value of what has been built through hard work and how it supports the family. As more meetings take place, you can expose the children to more sensitive information regarding your succession plan, company financials, etc. If there is a need to have a difficult conversation regarding sensitive wealth information, or perhaps implementing a new family policy, you can enlist your trusted advisors to either walk through the scenario in preparation of the meeting or invite them to help with the delivery of the message.

Identifying Leadership – What if the next generation isn’t interested in being involved in the family business, or maybe they’re just not fit for a leadership role? Getting your family involved in the business early can help you determine the probability of someday handing it over to the right person. To prevent the sense of entitlement with your children,  you should put them through the same, rigorous screening process as you would an external candidate, and be careful not to promote them to a leadership position too soon simply because they’re family. If your children aren’t prime candidates to lead the company in the future, consider extended family or an external candidate. Keeping the family business alive and growing is better than watching it die in the wrong hands. Business is business, family is family—you have to be clear where the lines are.

Above all else, start planning. As Benjamin Franklin once said, “By failing to prepare, you are preparing to fail.”
Planning is a process, not an event. Incorporate a will, trust, buy-sell agreement, or other legal documents that help define how you want everything handled when life strikes. Your Central Trust Company advisor can help you identify gaps in your plan or options to minimize risks and improve the chances of success.