Understanding The Importance Of Succession Planning For Family-Owned Businesses

Sep 18, 2023

If you are the owner of a family business, whether you started it yourself or it has been passed down for several generations, it is likely that you will one day pass the business on to your children or another relative. This process can be more difficult than it sounds, and may look a lot different than it did decades ago when the business was handed off to you. In today’s age, to ensure the business remains profitable and is operated efficiently, it is imperative to plan for succession. 

Succession planning for family-owned businesses can be complex; it is not an event, it is the progression and development of a series of practices that you employ every day. In this blog, you’ll learn why succession planning is a critical step to take to ensure the future of your family-owned business, as well as what the process may look like and other crucial factors to consider. 

What Is A Succession Plan, And Why Should A Family-Owned Business Have One?

A succession plan is a formal system to be followed at the time of the ownership transfer of a business. They are most commonly employed when the current owner voluntarily enters retirement, but they could also be used in the event of an unplanned or involuntary exit, such as death or disability. The plan will also determine the individual who will own controlling shares of the company as well as the individual who will become the next owner or operator. 

So, why is succession planning so important? Because the odds are stacked against your family-owned business. Long ago, a statistic emerged that was dubbed the “30-13-3” statistic that claimed to show only 30% of these businesses survive to the 2nd generation, while only 13% make it to the 3rd, and just a staggering 3% survive beyond the 3rd generation. While this data has been debunked many times, the fact still remains that family-owned businesses have to work much harder to remain afloat. Succession planning allows for mentoring and training the next generation of owners and operators so that the transition period isn’t so jarring. Owners are able to have control over their exit, and the productivity of the business won’t be jeopardized.

In addition, the mom-and-pop shops that many people think of when they hear the phrase “family-owned business” make up a very small percentage of the overall industry. These days, family-owned firms are much more sophisticated, and may hold stakes in a variety of fields and enterprises. In order to ensure the survival of your company, you must adjust to modern strategies and methods of operation, especially when it comes to passing them along to the next generation. 

What Should A Succession Plan Include?

Each company’s individual succession plan will look different, as it will vary based on its nature and size, as well as the unique goals and preferences of its stakeholders. The main components that many plans may have in common are:

  • Identification of the successor who will assume ownership of the business. In most cases, the owner’s heirs will be the obvious successor(s), unless there are none or they do not wish to have a leadership role in the company. 
  • An outline of how leadership roles will transition, such as who will take over key positions and a timeline of when they will take place
  • Details regarding the training and/or career development that the successor(s) will take part in to prepare for their new roles
  • Financial arrangements such as buy-sell agreements, valuation methods, and financing options
  • Definitions of the corporate governance structure for the future
  • Addressing legal and tax considerations
  • Contingency plans to be enacted in the event of unexpected tragedy
  • A well-defined timeline for the execution of the succession plan
  • And more

What Challenges May Arise During Succession Planning?

As with all other aspects of running a successful business, there are many complications that may arise while you are in the process of planning the succession of your business. The most obvious of them has to do with your heirs: having an heir who wants nothing to do with your business, having to choose an heir between your children, or having no heir at all. Family-owned businesses are different from other types of businesses because they have the added strain of employees who must maintain personal relationships on top of professional ones. In this type of challenge, there is no one solution; you must consider your unique family dynamics as you make decisions that will affect the future of your business, and communicate as openly as you can. 

Other types of challenges include unintentional negative side effects of the transition on employees. In order for the business to run proficiently, it must have a certain level of “buy-in” from employees, and the best way to obtain that is through honest communication with them. 

Finally, no business can be successfully passed on if the current owner is unwilling to give up the reins and understands when the sun has set on their day. You cannot expect the next generation of leaders to prosper if you refuse to step aside. While it is surely difficult to remove yourself from something that has been such an integral part of your life for so long, it is a necessary step that must be taken to ensure that the business can continue to survive. 

Tips For Family-Owned Businesses To Not Only Survive Succession, But Thrive!

The strength of your succession plan will be the determining factor in the sustainability of your business, both before and after the transition. In order to have a plan that is tailored to your business’ distinct characteristics, needs, and goals, it is in your best interest to seek an experienced business attorney to help you draft and implement your plan. They can assist with tax planning, certify that you remain compliant with federal and state laws and regulations; identify and mitigate potential risks; and oversee the legal aspects of the plan’s implementation and completion.

If you are about to embark on your succession-planning journey in order to prepare for the transition to your heirs, here are some other key suggestions for making sure the process has a positive outcome for both your family and your business:

  • Keep the unity of your family a priority
  • Communicate openly and honestly
  • Take your time choosing the right successor
  • Plan early 
  • Maintain a strong leadership team
  • Embrace tradition if it works, but don’t be scared of innovation or embracing the next generation’s perspectives
  • Preserve core values
  • Retain strong customer loyalty and relationships with suppliers
  • Implement effective management practices

Contact Zecca Ross & Smith Law Firm P.C. Today To Learn More

Our seasoned business lawyers have been helping clients run more profitable and efficient businesses for over 20 years combined! We have consistently achieved favorable results with our proven strategies and tactics. Call today to schedule your free consultation and learn more about succession planning.

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