When it comes to family businesses, there’s often an elephant in the room: what do you do about succession planning?
In this article we look at what is business succession planning for a family business, and answer the question of ‘how do I write a succession plan that’s successful?’
Liston Newton Advisory are family business succession planning experts. Contact us today to discuss your business succession planning options, and get peace of mind that your family’s future is secure.
How family businesses work
Family businesses grow and evolve over time. Typically started by one family member, that individual works hard, tying their business success to their family’s financial success.
Over time the business grows, gaining traction — and eventually, other family members may join the business, either in an employee capacity or in management.
A family business generally provides a stable foundation for a company, creating an entity that can ultimately be passed from family member to family member, generation to generation. This allows the family to create wealth as a standalone unit, and provide stable employment for family members that need it.
But at some point the founder will step down, whether through their own choice, health reasons, or otherwise. So what does the family do then?
This is why having a family succession plan is so important.
What is family business succession planning?
Family business succession planning is the steps and plans the family puts in place to transition ownership and management from the current owner to future generations. It is effectively the roadmap to keep the business in the family, and involves succession planning for both ownership and management of the business.
This is a crucial differentiation, as these are two different things:
- Ownership succession planning looks at how best to transfer ownership from one family member to another. It’s less about management decisions, and more about determining the level of equity interest transferred from the business, and to whom it’s going.
- Management succession planning focuses on transferring the business’ management and responsibilities to the next person. This takes a decision-making and governance focus, rather than determining who owns which parts of the business.
Does my business need family succession planning?
If you’re planning to hand the business over to someone else in your family, then yes, it absolutely does. There are big risks involved when you ignore succession planning, or when it’s undertaken poorly.
After all, it’s a family business, so ignoring succession planning puts the family at financial risk. If its leader and owner passes or steps down, and there’s no succession plan in place, the business is left rudderless. If the business isn’t being managed, it doesn’t generate income — and the family suffers.
What does the next generation want?
Importantly, family succession planning is about safely transferring the business to another family member. But what does the next generation want?
In some circumstances, they may not even want to be involved.
If there’s no natural successor, and no interest in the business, then your family is faced with a hard decision. If no one else in the family is prepared to take leadership of the business, it may be more worthwhile transferring it out of the family.
The risks of poor succession planning
Succession planning in family business is crucial for the family’s financial future. But it can be a difficult process, so it must be undertaken correctly. It’s wise to start succession planning with enough lead time, otherwise you face these big risks.
- Growing complexity: A growing family business can involve more than one family member. And the more involved, the more complex it will be. This leads to a wider range of differing viewpoints and opinions on management and ownership, which can lead to contrast and conflict if handled poorly.
- Family conflict: Family business succession planning is focused on the family unit, so it’s a highly emotional situation. Again, differing opinions and views can surface, based on different family member’s standpoints. A low level of conflict is manageable—but escalating conflict can tear families apart.
How to start thinking about succession planning in your family business
Family business succession planning differs from business to business. Ultimately it’s based heavily on the dynamic of the family, on the individuals and personalities involved.
So when looking into succession planning for your family business it’s extremely beneficial to get an expert involved. They can help you manage all the complex moving parts, such as:
- Determining business ownership, leadership, and governance responsibilities
- Managing the current business structure
- Identifying which family members are actually involved, and which want to be involved
- Planning for how the change will affect current business management and employees
- Mapping timelines for transfer of both ownership and management
- Determining how the current owners want to leave the business, and how they’re paid out
- Managing external issues, such as existing contracts, taxes, business licenses, etc.
Family business succession planning takes time; it’s a long-term process, not a once-off event. So don’t leave it for later.
If you have a family business, start your planning as soon as possible. Make sure you set aside time for all the necessary conversations with involved family members. Have detailed discussions around succession planning, and be sure to include all the necessary family members and decision makers.
This way you can identify any differences in opinion, any common views, and outline what the business ownership and direction could look like. By holding these conversations and discussions early, you can ensure any difficult interfamily negotiations are concluded prior to the actual transfer. You’re able to lay all opinions and views on the succession out in the open, and determine the best way forward for the family business.
The final word
When starting to think about succession planning for your family business, it’s beneficial to get expert guidance and support. You need experienced advisers for the tax, accounting, and legal structures, and also to manage any family negotiations.
So start planning early, and give your family the time to work through issues and avoid rushed decisions. It ensures a stable roadmap for the business’ future, and also puts plans in place in case of unexpected illness or death of the majority business owner.