Most family businesses do not survive to the third generation. A well-designed succession plan can help avoid this fate.
You are deeply committed to your business. This devotion has driven its success but makes planning for its future all the more daunting. You want your company to flourish but may lack time for leadership transition planning, a clear successor or confidence that someone else can run your company as successfully as you have.
You are not alone. Many of the business owners we meet do not have a succession plan, because they don’t think they need one or feel stymied by their options. In fact, one recent survey indicated that as many as 42% of family businesses have no plan, and that the majority of plans in place are informal.1 This lack of planning helps to explain why less than 12% of family businesses survive to the third generation.2
Business succession planning is a multifaceted and interconnected process that entails a number of key components. The following five, in particular, are crucial to supporting a smooth transition.
A Strategic Plan for the Business
A strategic plan examines the current state of the business and where it is headed over the next five years or so. The plan should consider the resources the company will require as well as potential future risks it may encounter in implementing its strategy. The need for resources, both financial and human talent, will inform other components of the succession plan.
A Financial Plan for You, the Business Owner
A financial plan considers your life goals and determines the financial resources required to fund those goals. It also considers your current financial assets, future cash flows from the business, and the impact of tax, inflation and projected investment returns to determine if there is asset sufficiency to achieve your desired goals. Business owners often find this step provides the peace of mind they need to confidently step away from the business.
Ownership transition addresses the future transfer of business ownership to the next generation. This transfer often entails multi-year strategies aimed at tax efficiency – minimizing the impact of income gift and estate taxes. Typically, these strategies call for the transfer of business interests to trusts for the benefit of next generation family members. Often, the challenge is deciding who will hold voting control of the business interest. Members of the senior generation frequently retain voting control of the company during their lifetime, but this can affect tax planning.
One of the key elements of a succession plan is the transition of leadership responsibility to the next generation. This transition requires the identification of a family member willing and able to take on the leadership role in the family business. In some instances, a family may decide to hire a non-family executive to run the business while the family retains ownership. Regardless, a well-defined onboarding process helps transition responsibilities to the new leader. It’s a process that may also include your finding a new purpose in life, as you make your own transition into what comes next.
At its most basic level, governance addresses how key business decisions will be made. With a family business, this usually takes two forms:
- Business: Using an advisory board or formal board of directors to support current management and the succession process is a best practice since these outside members provide perspective and can serve as an impartial sounding board. The board can also ease the transition of a new family leader by providing continuity in business strategy and leadership while helping to mentor the new leader.
- Family: A family council provides the family group with a framework for communicating and reaching a consensus regarding significant decisions: cash flow needs, risk tolerance, the possible sale of business, etc. A unified voice on the part of the family helps inform the board’s decision-making process.
A well-orchestrated succession plan assures both the continuity of your family business as well as harmonious family relationships. It should not be viewed as a single event but rather as an ongoing process. Successful leadership transitions take longer than many business owners anticipate, therefore, it is never too early to start laying the foundation.
To begin building or revising a succession plan for your business, we suggest collaborating with a multi-disciplinary team. At Northern Trust, we often work with clients this way and would welcome the opportunity to quarterback the process for you and your other advisors.