The Great Divide – Succession Planning in a Family-Run Business

All those who own family-run businesses dread the same question: “Who’ll take over when I step down?”

After all, succession planning is already a difficult and complicated process. Family dynamics only make it more so. Because of this, some small business owners regard it as one of the hardest decisions they’ll ever make.

A whole host of issues – legal, financial and emotional – come into play. But the future of the business depends on making the right decision.

Just how important is succession planning?

“Typically, succession issues are the biggest problem – having family that is capable of running the business and managing the transition from one generation to the next,” William Elliott, president of Elliott Electric Supply, told PricewaterhouseCoopers (PwC).

PricewaterhouseCoopers’ Family Business Survey shows that:

  • 38 percent of family firms think succession planning will be a challenge for them in five years’ time.
  • 58 percent are concerned their successors won’t have the skills needed to drive the business forward. 

This can have a massive impact both on the business and the economy. Data collected by the Conway Center for Family Business shows that family-run businesses:

  • Represent 50 percent of the U.S. gross domestic products (GDP)
  • Generate 60 percent of U.S. employment
  • Account for 78 percent of all new job creation
     

So, where do I start?

Broadly speaking, you have four options when you leave your business:

  • Pass the business on to the next generation.
  • Sell it to another company.
  • Divide ownership/management between children and external parties.
  • Sell the business to an investor.

The PwC research shows that 52 percent of family businesses plan to pass the business on to the next generation, but nearly a quarter intend to pass the company on to the next generation to own, but not run.

This is an important consideration because, according to research from the Family Business Institute, only 30 percent of family-run businesses survive to the second generation.
 

What comes next?

If you’re not going to sell your business to an investor or other company, you’ll want to take these three steps.
 

1. Actually start planning

According to the Curchin Group, the majority of family businesses – 67 percent to be precise – don’t have a succession plan. A lack of a formal succession plan creates uncertainty. It can also be risky, because there’s no one in place to take over in the event of an emergency, such as the current owner’s sudden incapacity or death.

A succession plan should be:

  • Formulated early
  • Based on opinions of management and stakeholders
  • A working plan – one that can factor in business change
  • Well communicated throughout the business

2. Identify talent

Establish who your successor or successors will be. You might have your children in mind, or you may be planning to sell to a third party, or a mixture of both. But you should also look across your company to identify talented individuals whom you think could one day lead the company or make a key contribution.

By lining up capable employees, you can have a “Plan B” with viable candidates in case your successor doesn’t work out as planned.
 

3. Ask for advice

As the owner of a small business, you’re probably used to making all or most of the decisions yourself. But it often pays to seek outside advice. Think about speaking to a family business consultant to help ensure you’re doing things right.

For more help with succession planning, review this PwC checklist.