Delaying succession planning could jeopardize your business’ future and family relationships.
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Open communication with your family can help you maintain focus and objectivity.
The company’s long-term vision, and family and economic interests, must guide your transition.
Transitioning your business to next-generation family members can be a complex task wrought with rigorous planning marked by tension and uncertainty among interested parties. Some owners fear the strain and disruption a transition may cause among family members and opt to delay key succession efforts.
All businesses, however, will eventually transition to new leaders. For families wanting to maintain ownership of their family businesses, it’s even more important that next-generation leadership and succession planning begin sooner rather than later. Waiting could be detrimental to the business's financial health and future growth, and affect the family’s connectivity and communication.
Who will lead?
Start to prepare your family for business succession by asking two questions:
- Who will lead the company when you leave?
- Is this person the best choice for the business?
The answers may not be as clear-cut as you think. Consider the following potential scenarios and questions:
- Do you have an heir who you have groomed to be your successor since they were a child?
- Will your children take on shared leadership roles after your departure?
- Do you have children who are interested in running the business but have little to no experience in a leadership role?
- Do you have family members who support the business and want to have some involvement, but are in separate careers and have no interest in day-to-day operations?
- Do your children have a strong interest in leading the business, but in your private assessment you sincerely believe they do not have what it takes?
Assessing your unique situation, weighing your options and then choosing the best leader or leaders for the business is critical to the business achieving your vision for its future.
While some family members may be passionate about the business and have expressed a willingness to lead, if their abilities don’t match what’s needed to run the company, they would not successfully serve the business going forward.
The company’s long-term vision, along with family and economic interests, must be the guiding factors in family business transition—as opposed to eagerness or birthright. It can be a tough choice, but it’s one of the most important decisions you’ll ever make for your business.
Following that, you must realistically assess your successor’s readiness for that role and be prepared to help the new leader transition over time into critical leadership responsibilities. Frequently, the most successful transitions occur in a phased approach. You, as the outgoing owner, may remain in a consultative role with the new leader over a couple of years until that person is grounded, experienced and prepared.
You, as the outgoing owner, may remain in a consultative role with the new leader over a couple of years until that person is grounded, experienced and prepared.
The company’s long-term vision, along with family and economic interests, must be the guiding factors in family business transition—as opposed to eagerness or birthright. It can be a tough choice, but it’s one of the most important decisions you’ll ever make for your business.
Outside management could be your solution
In some cases, you may believe it’s best for ownership of the business to remain in the family, but leadership needs to be passed on to an outside manager. Perhaps there is a lack of interest to lead among your next generation, or there is not a suitable leader candidate among family. Remember, you must be strategic about this decision for the good of the business.
To help maintain objectivity through what is often an emotional selection, consider turning to your business advisors to guide you. They can help you organize a leadership succession search and set parameters around screening and interviewing, possibly forming a committee that includes key family members to vet the outside management.
When your outside management is in place, you may want to keep your family engaged with the business through a family council, special board, or some other governance format that provides members a channel for communicating and collaborating with leadership.
Even though family members may not interact daily with the business, a formal structure enables the family to gather and exchange concerns and ideas with management. This helpful forum for your next generation can link the business with core foundational attributes and beliefs that your family can accentuate.
Strategies to bridge business and family
Other family business succession strategies to consider include:
- Providing a life insurance policy to those children or family members uninvolved with the business. This offers an equitable way to take care of family members who won’t be part of the company’s operations.
- Using partial business proceeds to launch a family foundation for philanthropic activities. Rather than the business, family members can be involved in operating the foundation.
- Leveraging a grantor retained annuity trust, buy-sell agreement, family limited partnership, or other planning tools to help structure the transition and leadership phasing for family members.
- Forming a family office that focuses on managing legacy wealth, leaving the leadership of a company to those better suited.
Variables unique to your business can influence your succession strategy. For instance, S corporations can be owned only by individuals and certain qualifying trusts; they cannot be owned by partnerships or corporations. However, S corporations are permitted to invest in and to own partnerships or corporations.
Ownership interests held by family members in S corporations, LLCs and partnerships may be transferred using various transfer planning techniques, including sales to other family members, sales to trusts for family members, or transfers to grantor annuity trusts.
There is no one-size-fits-all perfect strategy. Work with your advisors to identify the right approach for your specific business and family needs. If executed properly, the solution will be specifically tailored to your unique circumstances.
As a business owner, guiding your family through succession can be an emotional process. However, you can successfully transition your business by identifying a capable successor to lead it, keeping open communication lines with your family, and tapping into resources and specialized family-business advisors to help you maintain focus and objectivity.
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