Family Business Succession: Three Basic Steps

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When a family business passes to the next generation it is likely going to fail. At least that’s what the statistics indicate. To beat the odds, planning and forethought are needed to create a clearly defined family business succession plan. One that will succeed.

Without this, the momentum of the family business can be lost, causing it to fail despite its recent or current success. Though transferring the ownership of a family business to a new generation of successors can be challenging, there are three basic steps that can help you begin.

Step 1: Review Current Goals and Objectives

First, if you have one, take a look at the succession plan that is already in place. Even if it has not been documented the Founders (or Leaders) may have expressed a date when they would like to retire. They may have even identified their preferred successor. Whether formal or informal it is important for both generations and all parties to consider the plans, opinions, objectives and desires of one another.

As you review the retirement plans of the Founders, evaluate the goals and interests of the Successors. How well do the professional and personal goals of the next generation line up with the needs of the business? Are those who are active in the business enthusiastic about their current and future roles?

Once you have determined the interests of those involved in the business it is possible to determine the strategy and goals of the business itself. Taken together, you have the first building blocks for the succession plan.

In one case, the successors were very interested in expanding the family owned business. Involving them in the company’s business has energized both the Founder and the company. In just a few short years they have expanded to new markets and increased their revenues by more than fifty-percent. The Founder readily credits his sons for this growth.

Step 2: Write it Down 

It is never too early to begin writing the succession plan. Doing so makes the plan more concrete and straightforward; particularly when it is linked to the discussions about goals and objectives (Step One). Documenting the plan will help both generations avoid confusion and frustration, especially as the successors become more and more involved in the business.

Over time the plan will change as the needs of the business and desires of those involved become more focused. Even so, preliminary statements should be made from both generations, including:

  • Who will actually take over the management and ownership of the business;
  • What, if any, expectations will be placed on them;
  • How will active and non-active family members benefit from the business;
  • How will family members and the business support successors?

Be aware that the document will grow and evolve as both generations continue to discuss the succession plan.

Step 3: Plan for the Transition 

Be sure to explain how and when the transition will take place between the Founders and Successors; both with regard to management and to ownership.

Will Successors be expected to purchase the company or will it be gifted from the Founders? If the company is to be sold, will successors be given an option to purchase? Are there unexpected and unplanned issues needing attention to fulfill the transfer?

We met with the owners of family business and learned they had already agreed to have the Successor buy the company, paying for it over time. Unfortunately, as we looked into this we discovered that the original Founder (this was a 3rd generation transfer) had gifted shares of the company to his two daughters. Before the family business could be sold to the Successor, the company had to purchase the shares held by the daughters, who had never been active in the business.

In this case, even though there were multiple owners they had never signed a buy-sell agreement. This agreement should be drawn up to protect the interests of every family member holding ownership in the business. By establishing a fair value and reasonable terms the interests of all parties can be protected.

With the succession plan drawn up, it should be shared with the family, both those active and those not active in the business. To succeed, and to provide a seamless transition between generations, every member of the family should understand and support the plan; a plan that encompasses everyone’s goals, has been well documented and is ready for implementation.

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