Succession Planning for Family Owned Businesses

Succession planning is an important part of running a family business; however, only two out of three family-owned businesses have some type of succession plan in place, and only one in four have a plan that is sufficiently robust and documented, according to PricewaterhouseCoopers. Here are some important items to consider when developing your succession plan to ensure a successful and smooth transition.

Common Succession Planning Oversights

The five most commonly cited reasons a family business hasn’t developed a succession plan are:

  1. Not having the time.
  2. Feeling it’s too early to make a plan.
  3. Not able to find advice and tools to start.
  4. Overwhelmed by planning complexity.
  5. Having conflict with family or employees.

Among families who do have succession plans, there are certain issues that are commonly overlooked. Most plans focus on technical issues, such as the legal transfer of the business, tax implications, financing of successors and division of future profits. However, it's important not to leave out things such as:

  • Building a common vision for the business.
  • Communication in the business and family.
  • Clear delineation of roles and responsibilities.
  • Processes for transitioning daily operations.
  • Strategic planning and developing marketing, and sales initiatives.

Steps for a Smooth Transition

To address these issues and better plan for a smooth transition, Newport Board Group managing director Michael Evans recommends a five-step succession planning process.

1. Establish goals and objectives. With input from a professional team of advisors, this phase should include articulating collective visions and objectives for the business. It should address continued family ownership and leadership, and weigh the pros and cons of bringing in outside professional management. It should also consider the individual retirement goals and cash flow needs of retiring family members, as well as the personal and business goals of next-generation family members.

2. Establish a decision-making process. This should lay out the process that will govern the involvement of family members in decision making and establish procedures for dispute resolution. The processes and decisions you arrive at should be documented in writing and communicated to family members.

3. Create the succession plan itself. This should identify ownership and management successors, define active roles for family members, and define any support that successors will require from family members.

4. Create a business and owner estate plan. This should cover tax implications for the owner and business in the event of ownership transfer, death or divorce. It should also review owner estate planning strategies for minimizing taxes and delays in stock transfer. It should further develop a fair and tax strategic buy/sell agreement.

5. Create a transition plan. This should consider the options of purchasing versus gifts/bequests, and the possibility of combining these options. It should also consider outside financing versus self-financing options. Finally, it should establish a schedule for executing the plan.

Best Practices for Successful Succession Planning

To execute a succession plan successfully, Cypress Technologies owner Susan Ward recommends starting your planning at least five to 10 years before your anticipated transition. New entrepreneurs are encouraged to build succession planning into their initial business plan.

It’s also important to involve family members in the planning discussion. At the same time, it’s not necessary to give everyone an equal share in the business, and decisions should be made in the best interests of the business, as well as the individuals that comprise it. A successful transition also depends on training of successors. Finally, for best results, bring in professional consultants to assist with the planning process.