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Succession in a Family Business

Most owners of family businesses dream of their grandchildren and great-grandchildren taking over the enterprise someday.  But the reality is, only 43 percent of them have a succession plan to ensure the company’s longevity and only 12 percent make it to the third generation.

“If there is one area in which most family businesses could stand to improve, this is it,” according to a 2015 Harvard Business Review article, “Leadership Lessons from Great Family Businesses.”

Family-owned businesses have a lot going for them.  They employ 60 percent of the U.S. workforce, create 78 percent of all new jobs and generate 64 percent of the GDP, according to SCORE, a nonprofit network of volunteer, expert business mentors.

Research shows that family-owned businesses also do a better job of looking after their employees and view success not just in terms of profit and growth, but as a commitment to community and values.

But succession planning is not their strong suit.

“The transition from one generation to the next is the fault-line in this business model,” according to PwC report, “The Family Business Sector in 2016: Success and Succession.”  “Family firms are ambitious; they want to grow and ensure the long-term success of their business, but it is clear that many of the issues they face derive from a lack of strategic planning.”

Building a family business legacy requires a plan for leadership succession, board succession and ownership succession.  It’s a critical process that will require help from lawyers, investment bankers, accountants and other professionals.

PwC offers these suggestions to help family businesses develop a succession plan:

  • Develop a plan for potential leaders to gain experience outside the family business to acquire the right skills and competency for the company’s leadership.
  • Start the process early and set a timetable so everyone knows what to expect and to avoid misunderstandings and conflict.
  • Create a strategic plan for long-term objectives with the current and incoming generation, keeping in mind that the next generation may view the succession as an opportunity to modernize the business.
  • Make decisions through a process of consultation with everyone who has a stake in the company’s future, not as a dictate from the owner.
  • Expand the decision-making process.  As the business passes from one generation to the next, create an organizational structure that doesn’t rely on a single individual.
  • Prepare for the tax and legal implications of the succession plans to avoid difficulties that may no be obvious until it’s too late.
  • Strengthen the role of the board, which will play a key role in overseeing the succession.  Retiring family members can make substantial contributions by serving on the board.
  • Raise the competency of those who will be owning and running the business through education and development.
  • Prevent misunderstandings, or temptations to interfere, by clarifying the role that the retiring generation will play outside the family business and in the community.
  • Diversify wealth early on.  Relying solely on the firm to provide a retirement income can put a disproportionate strain on the business and make it harder to let go.

Family-owners businesses contribute so much to their families, employees, community and economy, leaders have a duty to build a succession plan for the company’s long-term future.  Preparing and nurturing older and newer generations and communicating clear expectations throughout the process can ensure the company’s legacy for many generations to come.