Succession Planning for the Family Business
August 1, 2012
By Loren Richards, First Western Trust | Laramie
There is a striking disconnect in family business succession planning between intentions and reality, and there are numerous statistics that underscore it:
- 88 percent of current family business owners believe the same family or families will control their business in five years (Family Business Institute).
- But, 73 percent of business owners in a Canadian/U.S. survey stated they hadn’t discussed the transfer of ownership with the next generation (Deloitte & Touche and University of Waterloo).
- Despite the aspirations of owners, only 40 percent of family-owned businesses survive to the second generation, 12 percent to the third and 3 percent to the fourth (Family Firm Institute, Inc.).
While a family business isn’t inherently doomed without a full-fledged succession plan, it’s important to note that failing to address succession in a timely manner is not a solid business plan.
And it is not just succession planning that a family should discuss.
Even when a business clearly has a very promising future, a comprehensive and sometimes difficult family analysis is needed. In one study, 85 percent of the generational failures were attributed not to a lack of a succession plan but to neglecting to undertake a proper family analysis to fully expose, evaluate and address critical family matters (Journal of Business Venturing). A family analysis is a process, guided by a neutral and objective professional facilitator, whereby everyone involved can express their views of distributive justice concerning the family wealth—what does each family member consider “fair” to him or her, as well as what would be “fair” to parents and siblings? What makes the analysis so vital is that an individual’s sense of fairness is typically unique and frequently underlain by undisclosed rivalries and tensions—involving spouses, other family members, etc.—natural to most family units. Confronting these issues is critical to the future success of the business.
Consider, for example, the thoughts and motivation of each child when equal shares of a family business are given to several children; maybe one or two have already invested considerable time to the ongoing management and success of that business. Those loyal children are unlikely to feel there was distributive justice. But that is not to say that the other children, who may have different aspirations and no interest whatsoever in that business, are feeling much better about the fairness.
A family analysis for the hypothetical family above could have yielded a transfer plan that appropriately rewarded those children involved in the family business with controlling interests, and put into place a means to allocate family wealth assets to those children with other aspirations and interests. Such means may involve merely a greater allocation of other family wealth, an appropriate buy-sell agreement, or it may call for the creation of additional money by strategic placement of an insurance product. Paramount is that every family wealth transfer plan should be as unique as the individuals making up the family itself.
To boil it down, a perfectly “equal” transfer plan results in pieces that are identical in shape, size and content. On the other hand, a transfer plan tailored as much as reasonably possible to address family members’ unique hopes, dreams and aspirations will look more like pieces of a jigsaw puzzle. The pieces may be vastly different from one another—or only slightly so—but they are designed to mesh to create a finished picture that is expressive and unlikely to erode.
Further, a family analysis needs to focus on the degree to which the family is able to generate value and ultimately wealth through its overall entrepreneurial activities. According to exploratory research in Family Business Review, entrepreneurial families had on average created five businesses and shifted industry focus 2.1 times. This indicates that succession planning needs to be nimble; a sole focus on a family’s core firm neglects the overall attitudes and mindsets of the family members. Entrepreneurial families and their advisers should champion the succession of the family’s wealth, not merely the longevity of a particular business.
A proper family analysis will encourage participants to articulate and clarify their own specific goals, perhaps for the first time. Without question, creating a transgenerational succession plan because that is the desire of the current owner—without a full and honest consideration of whether the intended successor(s) has the desire and ability to keep it successful—is as likely to fail as failing to plan altogether. In addition to unearthing potential issues and opportunities, a family analysis may lead to the conclusion that a particular family business can and should be transferred in some manner to children (or employees) willing and able to keep it successful. But it may also lead to the conclusion that time is near for harvesting the value in the business and creating new opportunities for the family.
Undertaking a family analysis, much like ordinary succession planning, is frequently unpleasant and requires much effort. Thus, it is easily postponed and avoided. But successful business families are typically well acquainted with hard work and dealing with challenges to their entrepreneurial spirit in an effort to build their business. This process is just another step on the path to building a successful business and growing the family wealth. The rewards are well worth the difficulties encountered, as a solid process for the future of their family success will be in place.
Myriads of noble business succession planning efforts by professional advisors focus on legal tools and techniques for passing profitable ongoing family businesses from generation to generation. But research is showing that even when a recommended succession plan is in place, most family businesses do not survive. Too often, succession planning results in a plan for transferring control of a business operation based almost wholly upon the founder’s intentions and expectations. Such a plan fails to analyze and address the full scope of the family’s entrepreneurial aspirations, which is the core of the family’s success. In a family analysis process, family and business concerns are overlapping and inseparable. Family analysis, if done honestly and openly, will disclose highly relevant and vital information needed to better define a process of building upon the family wealth and entrepreneurship. A process which may, or may not, result in an intra-family transfer of a founder’s thriving family business.
Please contact a member of the Wealth Advisory team for more information – 303.531.8100.
This article, written by First Western Trust Officer, Loren Richards, was featured in the June issue of the Wyoming Business Report.
The foregoing financial situations are general in nature, intended for informational purposes only and not intended to provided specific advice or recommendations for any individual or organization. Because the facts and circumstances surrounding each situation differ, you should consult your professional advisors for advice on your particular situation.