Many entrepreneurs who have family-owned businesses say that their most difficult challenges are deciding who will succeed the current generation and how to preserve and build the company’s value by providing for a smooth transition of ownership and management. Statistics support their concerns: Only 35 percent of family businesses survive past the first generation of ownership. Only 20 percent survive to the third generation. Yet, more than half of family-business owners don’t have a written succession plan, and when there is a plan it’s often inadequate, either because no family member wants – or is able – to manage the business, or because too many family members want to run the business.
Owners of closely held and family businesses are often too focused on day-to-day challenges, and they often fail to plan for the eventual transfer of the fruits of their labor to their families. In doing so, they jeopardize the future of their companies as well as the financial security of their families.
Succession is the process of preserving the real assets, spirit, ideology and mission of a family business for the next generation without extreme financial, emotional or management hardship. Succession predictably involves financial, emotional and management challenges. The goal of succession planning is to keep the challenges from creating extreme hardships that can imperil or prevent the continuity of the business.
There are two major activities involved in the process of family business succession. The first is the actual transfer of ownership and management of a family business to the next generation through sales, gifts and estate. The second activity is the operational survival and continuity of the business owned and operated by the next generation. Just because the next generation owns the business does not mean that succession will take place.
For your planning to lead to successful transition, you had better have an action program to keep you on track. The typical succession planning process involves several independent elements of family and business that can combine and derail your plan. These volatile combinations include business control, money, taxes, family members and personal health. Unfortunately, in the touchy, emotional family environment, there is no way of predicting what subjects will cause an explosion.
Although you can approach succession planning from several different directions, experience has shown that an effective succession process typically has these common action steps:
Succession planning is a process, not an event. And once the formal succession plan is in place, it must be an evolving document that’s reviewed and updated from time to time to reflect changes in the marketplace, competitive conditions, or your health or capabilities.
Wayne A. Simpson CPA, M&AMI is a Managing Partner at Utah Business Consultants and a Merger & Acquisition Master Intermediary with the M&A Source. Utah Business Consultants is a full-service Business Brokerage and Valuation firm.