Family Businesses Need To Plan Ahead
By Perry L. Wilson
As waves of baby boom generation family business founders reach retirement age, the choice between selling the business to willing investors or attempting to navigate the challenges that naturally come with “keeping it in the family” has come to the forefront like never before. Unfortunately, research shows that approximately seventy percent of family businesses today fail to successfully transition to the next generation. The reason for this failure overwhelmingly lies in the lack of or unwillingness to plan for succession. While it is certainly preferable to start as early as possible in developing a family succession plan, it is never too late to begin to grasp and implement some fundamental succession planning strategies if the goal is to maintain a family owned and run business for future generations.
If you are a successful business person, you probably have a strong grasp of the importance of predicting and managing the strategic, compliance, financial and operational issues that could affect the success of your business. Successful family business owners often have in place an additional process for managing family risks as well, so that their businesses will not be blindsided by an unexpected event like the sudden death of a family business leader or a disagreement over who is entitled to own shares in the company. Such family risks are predictable, and mitigation of those risks is more easily accomplished when the issues have been clearly defined and planned for in advance.
To effectively plan ahead, there are some basic questions you should ask yourself as a family business owner. What rules are in place regarding ownership and management of the family business, and does everyone in the family understand and buy into those rules? Do the necessary persons have the appropriate estate planning documents in place and fully understand what those documents contain? Have plans for ownership and management succession been formally discussed and agreed upon to address sudden unexpected changes that might occur? Does the entire family meet frequently enough to formally discuss the business and the issues that the business faces? Are there other known family businesses that have faced difficulties that can be learned from and planned for? What are the family’s biggest weaknesses? Are there any sensitive issues that the family either cannot discuss openly or simply avoids addressing?
In considering and attempting to answer the foregoing questions, there are two crucial processes that a family can create. First, a governance system should be implemented to guide the three fundamental parts of the family business. These three parts are family, ownership and management. While management is what actually makes the family business run and prosper, management will likely be prevented from performing up to its potential if it is not backed by a solid system of ownership, which, in turn, is backed by a solid family who agrees with and supports the ownership and management structure and the decisions made by the owners and managers. Communication is crucial. Regular family meetings with open, but structured, discussions about the nature and goals of the family business are the grassroots of a successful family business, and these meetings will foster trust among family members and achieve the important goal of transparency. In turn, ownership can draw from its experiences in family meetings and formulate plans of action to take to management for implementation in the family business. The end result of this structured process will be that all family members, owners and non-owners alike, will have the opportunity to contribute something to the family business, which should engender family harmony.
Once a three-tiered governance system is in place, a family business should formulate and implement a proactive succession plan that will transition the family and the business into the next generation. The most effective way to accomplish this goal is to develop a written succession plan that incorporates a step-by-step approach to dealing with both the psychological and practical considerations involved in the transition. The plan should first detail the skill sets and personality characteristics that a successor or successors should possess. This first step should include an evaluation of both the outside work experience, if any, of potential successors and what career path inside the family business would be most appropriate. Second, the plan should include a process for selecting a successor and should include such considerations as: to whom will the selection decision will be delegated (i.e. – shareholders, board of directors or a family committee), how will the decision be communicated to the family and the company, and what will be the timing of the decision. Of course, there are myriad additional considerations that are instrumental in this process, and the plan that your family develops should be very personalized. Whether the planning process leads to the conclusion that a family member is or may become qualified and capable of succeeding the current family business leader will certainly depend upon your particular situation, but, even if the decision is reached that a non-family manager is necessary, the important goal of planning and preparing for the future will have been met.
The most important thing for a family business owner to take away from this article is the fact that planning for the future is exponentially easier and more effective when the business is doing well and before a crisis forces action. As the old adage goes: “replace your roof when the sky is clear.”
Perry Wilson is a member of the Businesses & Corporate Law Practice Group at the Barber Law Firm. He can be reached at pwilson@barberlawfirm.com.