We strongly believe in the power of succession planning for any small business, but it’s especially important if the entity is family-owned. When multiple generations are involved in the business, there is an added layer of emotional stress that can sometimes complicate things. According to PwC’s 2023 Family Business Survey, only 36% of family-owned businesses in the US have a “entry and exit provision” plan/policy for the company.
Early planning allows for a smoother transition which can help reduce stress and potential conflict. Identifying and developing future leaders within the family or even within the company early on is essential for long term success. Beyond the documentation of a plan, a successful succession also involves managing financial trends, margins and controlling costs to secure the highest price for the business. Regardless of whether the business sells to a family member or a third party, a succession planning strategy should also be focused on organized financials, along with a strong identification of the market. To sustain the company and ensure the business thrives for years to come, a proper exit plan will be imperative. We’ve identified several significant things to keep in mind when it comes to planning for the future of your family-owned business.
Start planning early
While it may seem like the transition of power within a family business is years away, planning now is the best strategy. It can take years to ensure that the next generation is fully trained and experienced enough to take over. By starting the conversation and preparation now, business leaders will have ample time to brainstorm, document and execute their plan. Recent data reveals that only 56% of family-owned businesses agree on the future direction of the company. When it comes to leadership handover, the existing 51% of families who do not agree on the future direction of the company are going to struggle with a smooth transition.
Another challenge of delaying your succession planning: parties involved are waiting until late in the process to determine the structure of the transaction and how they are going to pay for it. That can lead to unsuccessful succession scenarios due to buyers being unprepared to make down payments, potentially bad credit history, weak personal balance sheets, etc. If they understood the expectation earlier, they could’ve taken proper steps to be a quality loan candidate. The planning applies as much to the buyers as it does to the sellers. Without proper notice, the potential successor lacks the necessary time to financially prepare. This can jeopardize a smooth and successful transition of a business.
Timely planning also ensures your offspring have the know-how to run the businesses properly. For those business owners with younger adult children, they’ll likely want and encourage their potential successors to gain outside experience before they join the family business. This builds additional skillsets, increases self-confidence, and shows other key employees that you’re not just “handing over the keys” of your business to your child. It’s a way to provide an additional layer of credibility for your offspring when they join the company.
Work with a family business advisor
Writing a succession plan is a process, not a singular task to knock out in a day or a week. While it possibly could be done in-house, it’s advisable to bring in outside parties to assist. To protect the integrity, legacy and assets of the business, experts can help. Family business advisors have the unique perspective and expertise to handle some of the most sensitive and complex issues that may arise while planning. From legal and financial matters, to ensuring the company’s mission, vision and values are aligned with strategic goals, a family business advisor can help identify and mitigate risks. A family business advisor offers the comfort of an unbiased expert whose main priority is to protect the company’s core values and worth. An objective third party like an advisor will likely help uncover opportunities, document a roadmap and safeguard the future of a family-owned business.
Embrace change and keep an open mind about the future
Tradition can be the bedrock of a family business but be aware that it can also be a barrier to growth and evolving the business. As younger generations move into the workforce, leveling up the company’s digital capabilities will be key to attracting and retaining talent. In PwC’s 2023 survey, only 39% of family-owned businesses said they have strong digital capabilities. Beyond digital capabilities, there’s an opportunity for family-owned businesses to prioritize ESG initiatives. This can be another element to increase employee engagement. While these considerations are not directly tied to documenting an exit plan, they are reminders that the family-owned business must keep their proverbial finger on the pulse to sustain themselves for future generations. The formula for success can change as time passes, so being open to fresh ideas and an innovative approach will keep the operation moving forward.
Conclusion
Those in leadership roles at a family business should act now if they have not already started a succession plan. By fostering the succession dialogue with both family members and non-family stakeholders, the process can be an ongoing collaboration between the company’s key people. Succession planning can be complicated and intimidating, but it’s a necessity to guarantee the business’s ongoing legacy for decades to come. This proactive approach ensures a much smoother transition and lessens the potential risk of disruptions. More importantly, it allows for the early development of future leaders who are invested in the growth and success of the company.
