Passing on a family business is a complex and delicate process – and one that shouldn’t be entered into lightly. An expert on the topic, Conway Center for Family Business Co-Founder Bea Wolper answers The Metropreneur’s questions on how to pass on a family business.
[M] How can a business prepare for a successful transition?
There are several steps that can help a family business begin their succession planning.
1. Identify key advisors and meet with them to develop a succession plan that addresses leadership, management, ownership and financial issues in the business. Take into consideration family members’ needs and wants and the business’s value to develop a plan that is as “fair” as possible for everyone involved based on their contributions and roles within or outside the business. Remember fair is not the same as equal, and equal is often not fair… so keep that perspective in mind as you discuss the options available.
2. Conduct a Wants/Needs Analysis with the current owner, future leader(s) and other family members to determine their needs and expectations. This can be a sensitive area for family members so allow ample time and create an environment that encourages open sharing. Have someone knowledgeable in family business succession moderate and guide the discussion.
- • Ask the current owner questions about his or her plans for retirement, their financial needs and their expectations for involvement in the business after they retire.
- • Analyze whether the next-generation leader is ready to assume leadership. Do they have the right skills and experience or do they need further development before they fly solo? Ask them what they need the controlling generation to do now to help them grow the business and what they want the organizational structure to look like when they are in charge.
- • Ask other family members about their wants and needs regarding financial and job security, income expectations and control of the business.
3. Get an appraisal or valuation of the worth of the business. Once the value of the business is determined, you will be better able to assess how it can be structured to transition it to the next generation. Most owners of a family business believe their family business is extremely valuable (much more than the appraised value). It is, after all, sometimes their most important child.
[M] How long before the transition should the process begin?
A succession plan should be thought of as a process that begins several years before the anticipated transition of leadership from one generation to the next. Once you’ve communicated with family members and worked with advisors to develop a plan that will work for your business, you need to reassess it periodically. A succession plan is a “living document” that needs to be reviewed and updated depending on economic conditions, new regulations, changes in family members’ participation in the organization, and other key factors that impact your family business. If any of these changes warrant a change in the succession plan, then act accordingly.
[M] What are your top three pieces of advice for a transitioning family business?
1. Don’t wait. Start planning now! It is never too early to begin laying the groundwork for the future.
2. Don’t assume you know what is on the minds of the current owner, future leaders or other family members. Communication is the key to making the succession process work for generations to come.
3. Find advisors that you trust and work with them to develop a plan that works for your family and your business. There is no “cookie cutter” approach. Each family business is unique and its succession plan should address its family members’ needs.
[M] Can you provide some statistics on family business transitions and their success/failure rate from generation to generation?
Eighty-five to 90 percent of all family business owners say they want to transfer their business to the next generation, but less than one-third are successful in accomplishing that goal. Twelve percent will still be viable into the third generation, with three percent of all family businesses operating at the fourth-generation level and beyond.
[M] What are some of the unique factors that come in to play when transitioning a family business?
Most founders of family businesses worked hard to develop a business that they are passionate about through many years of dedication and commitment to their dream. That dream typically includes passing on the business to a family member who will continue the business for years to come. However, because of the time commitment and dedication involved, a family business can feel like the owner’s “fifth child” making it difficult to let go and pass it on to anyone, even a family member with the best intentions. For that reason, taking the steps to transition the business are often put off.
The additional challenge of “family dynamics” adds a layer of complexity to succession planning. Many years of relationships between siblings, parents and children, etc., come into play and may enter into negotiation and discussions.