How to plan for succession in family-owned businesses

Succession is a problem that every family-owned business must deal with since it determines who will run the company once the existing owners and officials retire or pass away. The transfer of a family business from one generation to the next may include this tricky subject more than any other, and preparation (or lack thereof) might mean the difference between success and failure for the future viability of the whole family business. In the end, a family business owner has four options for how to dispose of their company: sell, give away during their lifetime, transfer upon death, or liquidate. 

Instead of leaving it to chance and hoping that those left behind will figure it out, effective succession planning enables the business owner to decide which option works best for the owner, family, and firm.

The conflict between the present generation’s leaders’ wants to assume leadership and the founding generation’s readiness to cede power is a major cause of failing enterprises in many family firms. 

What is a family-owned business?

Planning for succession is just one aspect of asset transfer in family-owned businesses. Family-owned businesses entail making plans for the maintenance, transfer, and ownership of an individual’s business in a way that advances the career goals and prospects of the family. Generally speaking, it is created to ensure that the firm will endure from one generation to the next.

A “family business”is not clearly defined, even though it is sometimes referred to as a “closely-held business,” and it may not even have any family members actively engaged in its management. A family business can consist of (a) two unrelated people who have formed a closely held corporation, (b) a husband and wife, (c) a parent and child, (d) any combination of these. or children, (d) or (e) siblings who run a business together or some other combination of the above. 

What is succession? ​

Family business succession is the process of changing your company’s ownership and management.

This process is sensitive and daunting, especially for founders or senior leaders who typically find it difficult to give up control over the day-to-day activities of the family business.

Contrary to common belief, it’s critical to recognize that a change in management does not necessarily entail a change in ownership, and the two changes do not necessarily have to occur simultaneously. 

Don’t confuse”family business” with “small business,” though.

According to an analysis of data from over 2,500 families and our combined expertise as family business advisors, the following tactics can help family companies manage the transfer to the next generation most effectively.

Planning for succession in a family-owned company

1. Strike a balance between control and collaboration

Family enterprises have problems with power and control just like any other company. These problems can get even more complex due to family relationships.

A schedule for taking over duties and standards for who has decision-making power should be included in succession planning. A place for rising leaders to exercise their autonomy in the pursuit of shared goals may be created by clearly stated desired outcomes for critical business choices. This aids in striking a balance between the strategic goals of the founder and the adaptability of developing leaders to determine how they can carry out the common vision.

2. Embrace the next generations’ perspectives

The fact that families had time to consider what values are essential to them in terms of relationships, business, and legacy is one benefit of the epidemic. Key inquiries received from several recent family engagements include how families want to utilize their money for the common good and how to adapt to new business and charitable possibilities.

These issues may start to be discussed in conversations on shared values that also incorporate cutting-edge concepts, which can help close the generational divide. family business with values in writing is more communicative, transparent, and prepared for succession, according to a new PWC study. According to the report, just 44% of firms have documented the family’s beliefs, despite the claim made by 70% of enterprises that they exist.

3. Bolster inter-generational solidarity

According to academic studies, exposure and affective commitment are crucial factors in family business succession. Early exposure to the business and regular discussions about joining the family business can help build the groundwork for a smooth transfer. In our work with families, we see that those that are successful at succession frequently discuss development potential, rivalry, the company’s history, and the ups and downs of a family business with the following generation.

They actively look for methods to let the next generation consider how their interests and aspirations could mesh with those of the business. Founders might offer their children the chance to work as an intern for family business executives.

Others establish a “family bank” to finance test initiatives and encourage an entrepreneurial mentality that is compatible with shared interests between generations. Inspiring the next generation to join the family company by demonstrating pride and happiness in it. Plans for successful transitions include strategies for fostering inter-generational relationships and negotiating win-win agreements to join the family business.

4. Embed high-trust behaviours

Any high-performing team must have trust, and it is especially important during family business changes. In the Thin Book of Trust author Charles Feltman divides trust into four categories: honesty, dependability, competence, and caring. Sincerity is the alignment of one’s words and deeds. Being reliable means honouring the promises you make to other people.

Competence is the determination that you possess the knowledge, abilities, and capacity to carry out your stated tasks. Having the other person’s best interests in mind fosters compassion. In three areas, you may be able to trust someone, but not necessarily in the fourth. Someone could be capable, genuine, and trustworthy, yet you suspect they are just thinking about themselves.

There are just a few scenarios in which you would be open to working with this individual.

To fulfil their commitments and expand the company, both generations must be able to rely on one another. The best transition plans contain practical steps to increase competency, credibility, and trust so that both generations can confidently transfer power and authority.

5. Co-design standards for readiness

The preparation of the next generation to take over the company is a major worry for family business owners. This is crucial since studies indicate that a lack of a ready heir accounts for 25% of botched transitions. Both sides may align and feel confident about their abilities to assume leadership positions by taking the time to jointly determine what preparation looks like.

Conclusion

To secure a seamless change in leadership and the long-term sustainability of the company, succession planning is a crucial procedure for family-owned firms. Families may successfully prepare for succession and develop the next generation of family leaders by adopting a methodical strategy.

Frequently Asked Questions?

What are the benefits of owning a family business?

The business ideals and success strategies can be passed on to the lineage.

Are family companies financed by just family members?

Not really, non-family members can own stakes in the company, but the family owns a majority stake and can influence management decisions.

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Richard Okoroafor

Richard Okoroafor

Richard is a brilliant legal content writer who doubles as a finance lawyer. He brings his wealth of legal knowledge in corporate commercial transactions to bear, offering the best value that exceeds expectations.

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