Updated August 17, 2015
Succession planning isn’t easy. You come face to face with the fact that, inevitably, your business will go on without you.
But if you’re a family or closely held business owner, planning for your eventual departure from the business is critical.
Family businesses comprise more than two-thirds of all businesses in this country, including a significant percentage of the Fortune 500. Nearly 90 percent of family business owners intend for their businesses to remain family owned. Yet history tells us that the odds are against them.
A Crisis in Family Business Succession
Only one in three family businesses survive into the second generation and even fewer, one in ten, make it to the third generation. More often than not, the failure results from the lack of a succession plan and not the lack of a viable business strategy.
It’s been referred to as shirtsleeves-to-shirtsleeves in three generations. And a major cause is the failure to plan ahead for the inevitable change in leadership.
The business community abounds with cautionary tales:
The founder that delays retirement and then finds that her intended (albeit unknowing) successor is now of retirement age and more interested in sailing than in taking over the business.
The CEO who assumes his children will run the business but never delegates responsibility, then finds that his successors lack crucial experience or skills to carry on.
Or the family that comes apart after the founder retires, due to conflicting expectations that could and should have been resolved pre-succession.
Even the founder parents who must “unretire” to save the floundering business, as well as the family’s finances and, therefore, the children’s inheritances.
During the next few years, more than a third of family-owned businesses will experience a change in leadership as their CEOs retire. Forty-two percent of those businesses have not chosen a successor. Of those with CEOs at least 61 years of age, the problem is worse: 55 percent have not chosen a successor.
For these businesses, it’s almost too late. Depending on circumstances, a successful transition can take years to plan and implement, and require the supporting skills of a team of professionals—including a CPA, an attorney and a business psychologist.
The process can involve elements of goal setting, strategic business planning, estate and gift planning, business coaching or mentoring, and family or individual counseling. (By the way, the succession planning process for closely held businesses is similar, but without the family dynamic.)
Best Practices in Succession Planning
While the succession planning process will vary for each family and each business, best practices include the following:
Begin early. In fact, it’s never too early to start planning for your business’ succession.
Assemble a trusted team of professionals to help you develop and implement your long-term plan.
Consider the needs, goals and success criteria of the family and family members as well as the business.
Maintain effective channels of communication throughout the process.
Make sure the business is structured appropriately to support your long-term goals.
Carefully consider the cash flow and tax aspects of the plan, as well as its impact on the founder’s retirement plan and estate/gift plan.
If you’d like to discuss your business’s succession plan or learn more about creating one, give us a call.
Plan for your future and beyond with Bader Martin.