Last updated on November 2nd, 2022
Handing over the reins to a family business should be a source of pride, accomplishment, and peace of mind; unfortunately for many, it results in family strife, erodes wealth, and leads to business collapse. So, how do you protect your family and a business you – and maybe even a few generations before you – spent life building? A strategic, well-thought-out, and executed succession plan is key.
At its simplest, a succession plan is a way to set up the next generation for success by defining how to transition management and ownership of a business. In Deloitte’s Business Succession Planning collection, it’s noted that a succession plan can drive business growth, lower taxes, set the stage for retirement, and preserve family harmony. It is also anything but simple.
According to ScholarWorks, 90% of the global economy is represented by family businesses; unfortunately, 70% of those have a first-generation failure rate. The goal of a succession plan should be to understand, preserve, and grow the business’ value and pass it on. Without a strong succession plan, families break up and go to court. Performance and reputation suffer, while disruption, conflicts, and uncertainties arise.
Enough said? Don’t rush to name your next CEO or get your estate planning underway just yet. While you may have the best of intentions, a succession plan involves a lot more than that. It could include a CEO job description, governance, and future strategic business plans while accounting for different skills and interests of new leaders, business context, and the changing marketplace and business environment.
A succession plan may define the process for planning; choices of entity structure, valuation, and financing; talent assessment, development, and compensation; estate planning including gift taxes, life insurance, and investments; and balancing business needs and family concerns to drive success. FamilyBusinessMagazine.com’s 9-step roadmap for succession planning suggests also addressing business transition, business strategy, risk assessment and contingency, and organizational business management planning.
An EY survey of large, longstanding family businesses around the world revealed that “they lay the groundwork for new leadership long before succession occurs” by defining who is responsible for succession; focusing on preparing the next generation; nurturing an entrepreneurial culture, and attracting top talent.
As reported in Harvard Business Review, “Just as a business must reinvent itself as markets shift, so must a business family reinvent (or at least thoughtfully revisit and refresh) its ownership and leadership model.” It suggests doing a few things in advance of making succession decisions:
- Articulating family dynamics and how they’ve changed since the start of the business (or transition from the last generation).
- Learn from other business families about how they managed the transition, who helped them, what worked and what didn’t, and any other advice they may have.
- Respect tradition but don’t be trapped by it; be open to new ideas and leave behind outdated preconceptions.
- Take time to let your plans evolve. Regularly review, update, and change directions when necessary.
- Be transparent and maintain open communication with all interested parties so there’s a shared view of the future that family, employees, and communities can buy into.
Remember, succession planning is a long-term, ongoing process – not an event. A successful succession plan can fill a need brought on by a variety of planned (i.e., retirement) and unplanned (i.e., health issues or death) events. Finally, the best time to put a plan in place is before it’s actually needed.
For more information on taxes, estate planning, and accounting in general, contact RBT CPAs, which has been serving Hudson Valley businesses for over 55 years.