Legal Blog

Want to Keep Your Family Business Alive? Start Succession Planning Now

There’s a reason why family business advisors tell their clients to start exit planning as soon as possible, regardless of a business owner’s age. There is only one absolute truth in business; that is, one way or another, everyone exits their business eventually, even if it means going out through death. The best time to plan is the present; the earlier you start, the greater number of options you have.

 

For family business owners, exit planning frequently (but not always) entails succession planning. Nevertheless, just as there’s a reason advisors recommend thinking about exit plans early, owners have their reasons for putting off these difficult conversations. A majority (70%) of family business leaders report that they intend to bequeath their companies to their sons, daughters, nieces, nephews, and grandchildren—and yet, less than a third of family-owned businesses survive through the second generation.

 

What’s behind the low rate of successful transitions? There are many likely causes: poor next-generation leadership development, lack of enthusiasm among heirs, an overvaluation of the company, economic and technological factors outside of the business’s control, and so on. In my experience, however, it’s the fear of these circumstances—and not the direct effects of these circumstances—that most often causes second- and third-generation family businesses to fold. An owner spends so much energy worrying about what will happen when his daughter inherits the business that he neglects to formulate a succession strategy before it’s too late. Remember: only 27% of family businesses have in place “a robust and documented succession plan for senior roles.”

 

If you own a family business and want to ensure it survives the next generation of leadership, here are a few tips for effectively planning for your succession:

Communicate, Communicate, Communicate

It should come as no surprise that communication has shown up as a recurring theme throughout this series on family businesses. As organizations are comprised—at least to some extent—of people who have grown up together and who take part in the same Thanksgiving dinner, family businesses are tangled in a web of unspoken power dynamics, intimate connections, personal vendettas, and years-long patterns of behavior. Communication helps people of all generations break through long-held assumptions and stereotypes about each other, find common ground, and connect on shared values.

 

If you’re a family business owner, talk with your potential successors about your long-term goals for and concerns about the company. In one-on-one and group conversations, ask your successor or successors how they intend to run the business, what challenges they foresee, and what questions they have now. You may hear ideas and learn things about your family member employees that you would not have known otherwise. Someone you haven’t yet groomed for leadership may feel more passionate about the company than you realized, for instance, or your child may bring another, more remunerative exit strategy to the table.

Don’t Delay Estate Planning

When succession planning, don’t only focus on the big picture. Nail down the particulars of your estate plan early, and you will have more time to prepare your successors and talk to them about your decisions. Too often, family business leaders pass away without discussing their wills and estate plans with their children and grandchildren, leading to conflict and confusion among heirs. A successor may face an unexpected tax burden or a delay in property transfers, or wonder why her brother got 50% of the business when he hasn’t put in as much work as she has.

 

Leaving your family business without an estate plan—or with a rushed, ill-communicated estate plan—not only hurts your family members; it’s a bad business decision overall. While successors are busy grieving, managing your affairs, and engaging in infighting over the ambiguous terms of your estate, a vacuum opens up at your company’s leadership. Thus, failure to plan appropriately and sufficiently ahead of time can leave key personnel (who may or may not be related to you) rudderless, sending the business into a downward spiral.

Ask for Help

With so much at stake and so many uncertainties to consider, no family business owner should attempt to devise a succession alone. The process of passing along a family business and choosing a successor frequently amounts to the largest legal and financial transaction in a person’s lifetime. Decades of personal wealth may be tied up in a family business, and your children may depend on the company’s continued success to pay for the education and well-being of their children—and their children’s children.

 

To protect the present and future of the company you’ve built, leverage the insights of those who have been there before. An experienced family business attorney can help you take stock of your assets and legal obligations, organize your estate plan, assess the tax implications of a business transition, and communicate your objectives to your team. An accountant, meanwhile, will help you maximize the value of your business, so you can rest assured you leave your company to the next generation in the best possible shape. As is the case with mergers and acquisitions, a skilled team can make all the difference during family business successions.

 

Of course, once you’re no longer in charge, your business’s continued success rests in the hands of your successor, so how can you make sure the next generation is prepared for what’s ahead? For additional guidance, catch up on the previous article—and all installments of this series—here. In the next and final part of my family business series, I will offer some thoughts on family business dispute resolution.

 

If you have further questions about succession planning or any business topic, please get in touch with me. I would be happy to learn more about you and your business and discuss your unique objectives together. You can find my contact information here.

ABOUT MICHAEL N. MERCURIO

mmercurio@offitkurman.com | 301.575.0332

Business attorney and M&A lawyer Michael N. Mercurio serves as outside general counsel on matters related to corporate law, M&A, and other lifecycle business transactions. As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on all aspects of business and commerce, with a core specialty in mergers and acquisitions—both from the sell side perspective and buy-side perspective.  Mr. Mercurio also routinely works with family businesses to help navigate through the unique challenges faced by such businesses.

 

 

 

 

 

 

 

ABOUT OFFIT KURMAN

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