This article was originally published on Forbes.
By Michael Gunther
Family-owned businesses are led by unique entrepreneurs who strive to leave a legacy for future generations of their family. These businesses are at the heart of the American economy, accounting for over 50% of the GDP in the U.S.
Succession planning for a family-owned business is a delicate procedure. Owners must factor in the longevity and legacy the business will leave while also ensuring the family stakeholders are happy with their role in the family business. The transition from first to second generation is perilous: According to the Family Business Institute, a mere 30% of family-owned businesses last into a second generation, 12% reach the third and 3% get to the fourth generation or beyond.
For current owners, it is not safe to assume that the next generation will automatically take over. Maybe the “kids” don’t want to follow in their parents’ footsteps, or perhaps the kids aren’t professionally prepared enough, through experience and/or education, to successfully take over the responsibility of running a company.
Succession planning is essential for every family-owned business, but it is especially critical for those who foresee infighting among the next generation. Succession plans are highly specific and based on the individual needs of the company; they strive to solve the dilemma of who will take over upon the founder’s retirement. Some founders insist on maintaining family control of the company, while others are open to executives from outside the family taking leadership roles.
Facets To Plan For
Consider these three key facets when developing a succession plan, including some important questions to ask.
1. Owner: Who will own the business? This person will take on the title of CEO or President and will succeed the founder. Founders should choose a future owner who will have the ability to carry out their vision to ensure a lasting legacy.
2. Executive(s): Who will manage and lead the business? This senior leadership role will be a Vice President or equivalent position. The executive has a nuanced role in a family business: They must be able to effectively manage the business itself, as well as key stakeholders (i.e., the family). Executives will oversee the achievement of long-term goals and will be integral to developing a strategy to take the business to the next level. They also must be nimble as they work to smooth out family disagreements.
3. The governing board: Who will be on the governing board, and how will they interact with the executive teams? The governing board can take on a few different roles. In most family-owned businesses, the governing board is responsible for ensuring the founder’s core values are consistently represented through the generations. Some family-owned businesses use the governing board as a philanthropic arm for the company. This gives family members the opportunity to be involved in the family business, without the responsibility of working for or running the organization.
Points Of Failure
Every type of strategy or goal planning has points of failure, and succession planning is no different. Consider the following common points of failure, and work them into the succession plan.
1. Executive preparation: A common point of failure is insisting that the younger generation take on executive roles, but neglecting to properly prepare them for the leadership positions. Don’t rely on the feeling that the company must be in the hands of family members. Instead, make it a rule that any family member executive must hold a college degree, or that they must find employment for a certain number of years outside of the family business. This ensures the executives have the skills, training and capabilities necessary for that level of leadership.
2. Family discord: Every family argues, especially when money is involved. Be sure to strengthen the governing board to effectively resolve any conflict. Also consider how the next generation feels about the family business — future generations will tend to be driven by different things, which could dictate the direction of the business. Creating a set of core values to follow will help ease the strain.
3. Wealth transition: Money matters are traditionally the biggest point of contention in a family business. Develop a plan to dictate where the company’s wealth will go each time ownership changes hands. Also keep in mind that the company could grow exponentially, making it more and more difficult for the next generation to buy out the current owners. Create a plan for future beneficiaries to determine if each family member will receive a fair share of the wealth or if shares will be dependent upon work put into the business. This is a point where a financial planner is necessary to work out any tax or legal issues.
Succession planning should be accomplished well in advance of an expected retirement. The plan will also serve the company in the event of the founder’s death, incapacitation or even divorce. Succession planning provides peace of mind that the company will thrive for generations to come.