Originally published March 15, 2010
*As seen in the March 12th issue of The State Journal.For owners of family owned businesses, one thing is certain, the
withdrawal of the owner of the family business is inevitable. This
creates a need to develop a mechanism for the successful transition
of the family business.
There are many issues surrounding succession planning and how to
pass the torch to the next generation. Most successful succession
plans will have at least three components:
- a process for providing continuity of competent business management;
- a vehicle for transferring the ownership in the business; and
- tax planning consistent with the other two objectives.
The major reasons that owners of family businesses sell out have
been identified as burnout or boredom, lack of capital for
operations and growth, and children having no interest in running
the business. We have all heard that approximately 65 percent of
family businesses fail in the second generation and that by the
third generation 80 percent of those businesses close their
doors.
There are many reasons that family businesses fail in the second or
third generation. Some fail because no family member wants to
become active in the business. Others fail because those who are
interested are not capable of managing the business. Other reasons
include improper tax planning, competition, inadequate
capitalization, or failure to meet technological, production or
marketing advances. However, perhaps the single most devastating
factor that contributes to the failure of a family business is
unresolved conflict in the family. Therefore, any succession
planning process must address, head-on, the issue of existing and
potential family conflicts. This can be a difficult task. It is
also not always possible to identify all existing conflicts or to
anticipate future ones. Notwithstanding this bar, the succession
plan should endeavor to identify and resolve existing conflicts
within the family and establish a process for resolving future
conflicts as the ownership and management of the family business
passes from generation to generation.
There are basically six groups of people that should be addressed
in a succession plan. Those include the owner, his or her spouse,
his or her children or relatives that are involved in the business,
his or her children or relatives that are not involved in the
business, the spouses of his or her children or relatives that are
not involved in the business, and other key employees.
The first element of a succession plan is a comprehensive analysis
of the family. The second requirement is to assess the
company's key employees and other persons that are critical to
the development of the company. Criteria should be developed for
the transition of management and in the design of a plan that makes
use of that criteria. Another ingredient of the succession plan is
a business plan. The business plan usually serves as a mission
statement for the company and should explain why the business
exists, who it serves, and how it operates. Another critical
component of a business plan is to have a clearly defined family
plan. The goal of the family plan should be to preserve family
unity and harmony that will focus on several different issues. The
last element of a succession plan is the actual preparation of a
formal estate plan of the owner.
To have a successful succession plan, it is generally advisable to
implement the succession plan when things are going well. Based on
my experience, most succession plans originate in the estate
planning arena. Most families do not disclose their estate plans
(and/or succession plans) to their children. Unfortunately, a great
deal of estate planning and hence succession planning is done on
the owner's death bed.
Comprehensive and thoughtful succession planning is a
time-consuming and challenging proposition. A plan which merely
transfers stock ownership at a minimum tax cost, by itself, does
not address the most critical elements necessary to provide for
successful continuation of the family business. Succession planning
for the family business should consist of a thorough plan
containing the input and elements discussed herein. It should be
developed well in advance of the event which gives rise to the
owner's withdrawal. Anything less risks, or even encourages,
family and employee discord, emotional trauma, litigation, and
significant economic loss in both the short and long term.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
