Goering Center news

By Amy Bixel and Andrew Hagedorn

Succession planning is one of the most daunting challenges facing family-owned businesses, and the way owners approach this complex process could make or break their legacy.

According to the Family Business Center, less than one-third of family businesses survive into the second generation, 12 percent make it to the third and just three percent last into the fourth¹.

To overcome these grim statistics, family business owners must think carefully about the complexities of succession planning and begin long before they’re actually thinking about exiting the business.

Here are some tips to consider.

Many business owners are too busy managing daily operations to focus on succession planning. Only 18 percent of family-owned businesses have formal succession plans in place, according to a 2019 PwC survey², and the Business Enterprise Institute found that 48 percent of surveyed business owners haven’t discussed succession at all³.

A poorly planned transition could leave a business with insurmountable debt or insufficient liquidity, not to mention disappointed family members and a discouraged workforce. With such severe emotional and financial risks at stake, it’s critical to begin planning sooner rather than later.

Exit planning can become overwhelming, so start small by breaking the process into manageable questions. If you suddenly pass away, what do you want to happen to the business? Next, think about where you see the company going five, 10 or 20 years after handing over the reins.

Succession planning is not a one-time task but a continual process, and it is critical to periodically revisit your plans as market dynamics, relationships and other factors change.

You don’t always share the same passions as your parents, so don’t assume that your children will have the interest and/or ability to carry on the business you’ve built.

Sharing a last name doesn’t automatically qualify your replacement, which is why more business owners are requiring potential heirs to gain independent experience outside the family business. This gives successors an opportunity to explore their leadership capabilities and bring fresh perspectives to the business.

To protect your legacy, you must be objective enough to consider that your next of kin might not be the best choice to lead your business after your departure. Planning early and thoroughly allows you to review all your options and determine whether an Employee Stock Option Plan, sale to a key employee or if other options make more sense.

Succession planning can be emotionally taxing. Examining the numbers behind the transaction can help owners maintain an objective perspective.

A proper business valuation is vital to help you understand the value of your business. Structure your succession plan to account for adequate liquidity in order to fund the transfer of the business without causing a cash flow crisis. To that end, owners may want to weigh various strategic sale strategies, such as gifts, installments or sales to trusts.

Lastly, make sure you have objective input into your succession plan by bringing together a trusted group of advisers to contribute their expertise. Your lawyers, accountants, lenders and other financial advisers should all have a seat at the table to help facilitate a successful transition.

¹ Family Business Facts. Conway Center for Family Business. Accessed April 2019.

² 2019 US Family Business Survey. PwC. Accessed April 2019.

³ 2016 Business Owner Survey Report. BEI. Accessed April 2019.

Amy Bixel is...