Succession Planning in a Family-Owned Business

Succession planning is important in any business, but it's sometimes overlooked in family-owned operations. This is a big mistake. There are numerous former family-run companies that no longer exist due to poor or no succession plan. Some studies show that among family businesses, only about 30 percent succeed to the second generation and 10 percent into the third generation.

The plan needs to be well thought out and discussed with everyone affected. Don't just assume that a son or daughter will want to carry on the family business. Even if your children say they will take over, they may not have the true desire required to continue a successful operation.

Consideration should be given to business and personal goals, as well as the plans of the next generation. Who has the most aptitude for leadership? Who wants to stay with the business?

The "heir to the throne" also may not have the business skills to succeed after a parent (or aunt, uncle, etc.) turns over the reins.

Another question that needs to be settled in the case of multiple potential successors (for example, more than one child): What responsibilities will each person have upon succession? It's important that the details be worked out early, because, in the case of an unexpected death or disability, succession might occur sooner than planned.

You also need to address the involvement of the next generation. In some situations, the retiring family elder has adult grandchildren - some who may already be working in the business.

Beyond the discussion of the roles of younger family members, you will also need to outline the times for major transitions, barring unexpected illnesses or death.

You want to make sure that the future leaders of the business have the proper training. There are several different options. One is having younger family members work in several different areas of the business. Another is having aspiring family business leaders get some experience in another, non-family business to learn alternative ways of doing things.

The importance of preparing for succession can't be overemphasized. Neither can the importance of transitioning the business in an orderly fashion.

Sometimes, as planned retirement nears, elder family members don't want to let go. This can cause resentment on both sides. Naturally, the elder family members want to see the business they built (or took over, if already a second generation business), continue to succeed as it did under their leadership. They can be concerned that the firm won't flourish without their direction.

At the same time, the younger family members may think they can bring the business to even greater success if the older relatives would just step aside. This is where a scheduled, gradual transition of management and leadership responsibilities from one generation to the next can help.

As they turn over the reins of the business, elder family members can be compensated through preferred stock in the corporation. They can also look to stay involved in business -- if not directly -- through participation in industry groups and associations.

Such actions recognize the contributions of retiring members and help them recoup their equity. Meanwhile, the new manager and active relatives can plan for the future.

And once retiring family members are no longer immersed in the daily grind of running the business, they may be interested in pursuing non-business community activities, personal hobbies, and travel that they never had time for before.

Article reprinted with the permission of Sobel & Co. LLC. For the full copy of this month's Sobel newsletter, please visit http://www.bizactions.com/n.cfm/page/e116/key/183717611G2575J3933849/