5 Common Mistakes in Family Business Succession Planning

By: Rich Craig, CPA/ABV/CFF, CVA, MAFF, CITP, MCP

Deciding who will take over a company they've spent years building can be difficult for any business owner. Succession planning for a family-owned business comes with additional challenges. You're not only making decisions that can affect the long-term success of your company but also navigating the needs, expectations and relationships within your family.

Family business succession planning involves more than simply naming someone to take over. It requires careful consideration of family dynamics, business needs, and the challenges that can arise along the way. Avoiding these common mistakes can help ensure a successful transition and the continued health of your business.

Mistake #1: Waiting too long to start business succession planning

An owner may begin thinking seriously about succession only three or four years before retirement. In many cases, however, developing a successor and preparing the business for a successful transition can take 5 years or longer.

Starting earlier gives potential successors time to gain experience and develop their skills. It also give the current owner time to determine whether the person they envisioned taking over is actually right for the role/

Be sure to revisit the plan every few years. As the transition gets closer, consider annual discussions with the company's corporate attorney and outside accountant to keep everyone aligned.

Just because a child grows up around the family business does not meant they want to run it. Often, they feel obligated to join the company, even if their interests lie elsewhere.

Start those conversations early. Determine whether the successor you have in mind has a genuine interest in the company, then consider their strengths and where those skills would be the most valuable.

And remember, not every family member who wants to be involved needs to become the next president or CEO. Someone with a passion for marketing, finance, or another area may be a valuable part of the next generation of leadership without running the entire organizaiton.

Mistake #3: Confusing Equal with Equitable

When multiple children are involved, parents naturally want to treat them fairly. Within a business, however, fair does not necessarily mean equal.

A company needs clear leadership. If one child has spent years preparing to lead while another as little interest in day-to-day operations, giving them identical roles may not be what's best for the business.

A business owner may want to treat children equally, but equal ownership and equal roles are not always equitable or best of the business. The estate plan can provide fairness among the children without giving each child the same position or authority within the company.

Mistake #4: keeping the Succession Plan in your Head

Having a general idea of what will happen in not the same thing as having a family business succession plan.

Telling a child, "I'm retiring in five years, and you're taking over," leaves many questions unanswered. Putting the plan in writing creates clear expectations for everyone involved.

A written succession plan should address:

• The timeline for the transition and gradual shift in decision-making
• Milestones, education, training or outside experience the successor needs to complete
• Skills the successor needs to develop
• Expectations for both the current owner and future leader

Formalizing the plan also helps the potential successor understand what taking over actually entails. Once they see the responsibilities and expectations involved, they can make an informed decision about whether they truly want the role.

Mistake #5: Failing to Prepare the Next Generation to Lead

Once you identify a future leader, training should be intentional. Consider the skills and experiences they will need rather than relying on them to learn simply by following the current owner.

Some larger multigenerational businesses establish formal requirements for family members, such as earning a college degree, working for another organization and gaining outside managerial experience before joining the family company.

Smaller businesses may not need that level of formality, but they can follow the same principle: Identify what the future leader needs to know, then create a plan to help them learn from it.

Preparation should also include a gradual transfer of responsibility. For example:

• The owner might reduce their schedule while making key decisions alongside the successor.

• The owner could become chairman of the board while the next generation takes responsibility for day-to-day operations.
  

A gradual transition gives the new leader room to make decisions while still having an experienced resource available when needed.

What Should a Succession Plan Include?

A complete succession plan addresses three separate questions:

• Who will manage the business?
• Who will own it?
• Who will control major decisions

Those roles do not necessarily need to pass to the same person or at the same time.

The plan should also explain how ownership will transfer and how the transaction will be funded. Depending on the circumstances, this may involve a sale, gift or redemption of ownership interests. A business valuation can help establish value, while careful planning can address payment terms, cash-flow needs, and potential income, gift and estate tax consequences.

The plan should also address what happens if the owner dies, becomes disabled or is otherwise unable to continue working before the planned transition. Buy-sell agreements, life and disability insurance, signing authority and an interim leadership plan should be reviewed before an emergency occurs.

For family businesses that may continue through multiple generations, the succession plan should address how ownership and governance will evolve as the family grows. Clear policies for family employment, compensation. distributions, ownership transfers and redemptions can establish expectations and help keep family considerations from interfering with sound business decisions.

Addressing these details in advance helps protect the business and provides a clear path forward through both planned transitions and unforeseen circumstances.

Get Help with Your Family Business Succession Plan

At 415 Group, we help family-owned businesses coordinate the financial, tax and operational aspects of succession with the company's legal and estate-planning advisors. We also take a multigenerational approach to client relationships by introducing younger partners to the next generation well before a transition occurs.

Succession does not need to be imminent to begin planning. In fact, the best time to evaluate the alternatives is often while the owner still has the time and flexibility to make deliberate decisions.

Contact 415 Group to discuss how you can begin preparing your business and the next generation for what's ahead.

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