Ownership & Governance

Succession Planning in Family-Owned Business

A panel at the 2013 Vistage Think Big Conference discussed the often daunting topic of succession planning in family-owned businesses. The panel included: Todd Anders from GuideCap Partners, LLC; Chris James, experienced CFO consultant; and R.J. Kelly, Founder and President of the Wealth Legacy family of companies. All had experience with transitioning family-owned businesses through the complex task of succession planning. Statistics are not lined up on the side of these businesses, so leaders must analyze their options carefully.

Research by the Small Business Administration states that only 30 percent of family-owned businesses succeed to the second generation. Third generation family members fare even worse at 15 percent, or half the success rate of their second generation counterparts. If you do not fall into this category, why should you pay attention? The same study tells us 90 percent of businesses in the United States are family-owned and closely held. The likelihood you will work for or with a family-owned business, if you have not already, is high.

According to the presentation, family-owned businesses transition in three unique ways. First, 40 percent of businesses opt to transition from one generation to the next. Secondly, 34 percent of businesses plan to sell to non-family members. Lastly, 26 percent of family-owned businesses transition their business to heirs, but with professional management taking the reins of the company. Panelists agreed there is not right or wrong way to transition a family-owned business, but a plan is essential.

The panel boiled down the necessary nine steps to proper succession planning:

  1. Make it a family affair – the best outcomes occur when you talk it out as a family. Yes, this can be a tough, emotionally charged process, but do not let that stop you from planning wisely.
  2. The planning team should not fit in a Mini-Cooper. Be sure to hire a cross-disciplinary team, which should include more than simply one attorney and one CPA.
  3. You get what you pay for. Don’t be cheap. Your process will be less costly overall if you pay for proper input now.
  4. Begin with the end in mind. What are the desired goals for business and family? For example, decide whether you want the business to be in family for many generations or one generation.
  5. Who is left behind after you leave? Your “enterprise value” depends on the answer. This is a difficult one to answer. Seek advice from others, especially a few trusted advisors outside the family.
  6. Find out and analyze the true value of your business now and for future generations. Are you selling a product or service that may not be relevant in 30, 50 or 100 years?
  7. Let the process simmer. Take at least three to five years to prepare your plan. Succession plans that are quickly developed and implemented are rarely successful.
  8. If you do not properly protect your assets, you can lose it all. This means more than just good estate planning. The panelists suggest a detailed, deliberate plan developed and scrutinized by financial specialists.
  9. Don’t leave money on the table. Do not be an “involuntary philanthropist.” Most business owners would want the assets from their company to support the life and health of the family business when the time comes, and not to be arbitrarily divided between family members.

Many attendees of the session shared they were concerned about succession planning and felt inspired to put more energy and attention into this important subject. Do you feel like there was a missing piece of advice in the list above? Or which item in the list did you feel was most valuable? Share your thoughts in the comments below.

Category: Ownership & Governance

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About the Author: Terry Morawski

Terry Morawski has worked as an education executive for more than 10 years. He currently writes a monthly column, Tech Toolbox, for Texas School Business magazine. He has presentedon communications and technology topics at national conferenc…

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