Succession planning for family businesses

How can I ensure that my small business will survive the transition into the next generation?

Less than one third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership. At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few.

The following is a list of options to consider:

• Close the doors.
• Sell to an outsider or employee.
• Retain ownership but hire outside management.
• Retain family ownership and management control.

There are four basic reasons why family firms fail to transfer the business successfully:

• Lack of viability of the business.
• Lack of planning.
• Little desire on the owner's part to transfer the firm.
• Reluctance of offspring to join the firm.

The primary cause for failure is the lack of planning. With the right succession plans in place, the business, in most cases, will remain healthy.

What's involved in succession planning for family businesses?

Transferring the family business requires the family to make a determined effort to do the following:

• Create a business strategic plan.
• Create a family strategic plan.
• Prepare an Estate Plan.
• Prepare a Succession Plan, including arranging for successor training and setting a retirement date.

These are the four plans that make up the transition process. By implementing them, you will virtually ensure the successful transfer of your business within the family hierarchy.
Q: What is a business strategic plan?
A: A strategic plan for the business will allow each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company's future. This plan is long term in nature and focuses on where you want the business to be at some future date.
Q: What is a family strategic plan?
A: The family strategic plan is needed to maintain a healthy, viable business. It establishes policies for the family's role in the business. For example, it may include an entry and exit policy that outlines the criteria for working in the business. It should include the creed or mission statement that spells out your family's values and basic policies for the business. The plan should consider which family members desire to have a part in management of the business versus those who desire a more passive role.
Q: What is an estate plan?
A: An estate plan is critical for the family and the business. Without it, you will pay higher estate taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax effective manner.
Q: What is a succession plan?
A: A succession plan will ease the founding or current generation's concerns about transferring the firm. It outlines how succession will occur and how to know when the successor is ready.