Running a business is a challenging but rewarding endeavor. For many business owners, one of the most meaningful facets of the experience includes making the business a family affair, usually by handing the reins of the business to a family member at some point in their life. While it tends to be an afterthought for many owners, succession planning for a family-owned business is key to leaving behind a strong and impactful legacy. Today, I will discuss the premise of succession planning, common mistakes, and tactics to build a strong succession plan for your family-owned business.

Succession Plans in Family-Owned Businesses 

Succession planning for family-owned businesses involves creating a plan for when a company's leadership has to step down, whether for retirement, health reasons, or other life events. While many family-owned businesses hope to pass their company on to the next generation, there is often no plan in place to do this effectively. It is estimated that 70% of family-owned businesses will not make it to the second generation and 90% won't make it to the third generation.

Thus, the first step to ensuring a successful transfer is deciding to partake in succession planning. This can be a lengthy process, but with good reason. There are a lot of decisions to be made, including what's pertinent for the business and the family. Generally, it is estimated that good succession planning takes several years. Getting ahead of this helps ensure that your business and legacy survive a generational transfer.

Common Mistakes in Succession Planning

It shouldn't be surprising that there are often many mistakes made during the succession planning process. Here are some of the major issues to avoid when navigating a plan for your business.

1. Setting and maintaining personal and professional boundaries

When it comes to family businesses, there are a lot of emotions and expectations attached to succession. This can result in unintended conflict, ruptured relationships, and negative impacts on the business. It is important to set personal and professional boundaries early on to help manage everyone's expectations throughout the process.

2. Procrastination

Most business owners know they need a plan. However, taking the time to put a plan in place could require significant time and resources so they put it off with the thought they have plenty of time. The problem with that is many exits are involuntary. As a business owner you do not want your family to deal with the emotions of a loss and on top of that figure out how to protect their financial safety net as well. Therefore, families should do their best to start the process early, giving them plenty of time for contingencies or bumps along the road.

3. Insufficient research

Often, business owners don't consider all their options. This may include choosing someone unexpected to be the successor, such as a different family member, non-family member, or even a competitor. In parallel to the time consideration, businesses should have the time and space to do proper research, understand succession needs, and employ a plan that will best fit the business.

Tactics to Building a Strong Succession Plan

Understanding the common mistakes that can occur with succession planning is a great start. The next step is learning what tactics can help mitigate these mistakes and smooth the entire succession process.

1. Maintain transparency with key stakeholders

While some decisions and discussions may need to be kept quiet, general transparency to family members and employees is key. This includes letting everyone know that succession planning is occurring, offering an overview of potential options, and reminding everyone of its intent. Communication is a key to avoiding family rifts, surprising employees, or taking the business in an unintended direction.

2. Stay aligned with the organization’s personality

While family feedback is important, so is employee feedback! You don't want to kill your organization's culture or sense of trust through poor planning. Everyone needs to cooperate and support the organization through transition, so aligning yourself with your entire organization's needs is key.

3. Seek professional assistance

When in doubt, consult the professionals. It cannot be stressed enough how important professional advice is to succession planning for a family business. Not only do professionals have a more objective view of the business and can advise independently in this manner, but they also are aware of considerations that a business owner may not know about or have time to manage. They will be a critical resource through succession planning.

Not sure where to look for assistance? Our team at Lutz is highly skilled in business transition consulting, including having an expert team that focuses specifically on M&A services. If you have questions on how we can help your family-owned business with succession planning, contact us for additional information.