5 Steps to Create a Workable Family Business Succession Plan

The importance of the family business to the United States economy continues to grow, and family businesses are beginning to reverse the trend of mega-businesses wiping mom-and-pop stores off the map. Family businesses now account for about half of the U.S. Gross Domestic Product (GDP), a measure of the economic productivity of a country.

Family-owned or family-run companies are responsible for 60 percent of the jobs in America and nearly 80 percent of new jobs created. However, research indicates around only 52 percent of these family businesses expect the next generation can handle the businesses on their own. The leading concern about keeping management in the hands of family members is uncertainty regarding their aptitude and experience.

Growth and Sustainability

Family businesses often have intimate histories and complex cultures that are difficult for outsiders to understand. Today’s families are often more complicated and less traditional due to geographical relocation of family members and alternative economic opportunities available to family members.

Family businesses also have several other issues may hinder the successful continuation of the business. Fortunately, with focus and planning, most of these can be overcome by paying attention to the details.

Five key issues include:

1. Generational transition: Only a third of all family businesses successfully make the transition to the second generation.
2. Alignment of family interests: Alignment of interests between current owners and others becomes more pronounced as members retire and turn over the reins to the new generation, while at the same time looking to the company for their retirement income.
3. Interfamily disputes: While the interest of one family member may not be aligned with another family member, these situations can become even more difficult where there is, for example, a divorce of a family owner or a death and the surviving spouse is holding at least partial ownership, but is not involved in the business.
4. Balancing of financial returns: Creating buyout agreements is challenging. When the retiring generation looks to the value of their interest, they may tend to look to a balance sheet number. However, the true value of a business should probably be based on an earnings capitalization model, a concept unfamiliar to many smaller family companies.
5. Estate and Inheritance issues: These include federal and state estate and inheritance taxes and probate delays upon the death of a family owner.

What to Do? A Five-Step Process

By following five key steps relevant to almost all family businesses, the business can create a viable succession plan, provide for the financial independence of the retiring owner(s) and position the business for continued success and growth:

Step 1: Establish Goals & Objectives

Step 2: Establish a Decision-Making Process

Step 3: Establish the Succession Plan

Step 4: Create a Business and Owner Estate Plan

Step 5: Create a Transition Plan

Not every family business will survive and many do fail, primarily because of differing family interests and the ability of the next generation to grow the business. Taking these five steps now will save money and time and will help assure the continued success of your business.

Michael L. Evans is the Managing Director for the Newport LLC

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