You have spent your entire professional life owning and leading your family business. You are the founder or next-generation family member running the business and you are now approaching retirement age. To retire you will need to transfer your leadership responsibilities to a next generation family member and potentially some, or all, of your ownership. Have you prepared a plan to transfer the leadership responsibilities and ownership to the next generation? Many family business owners have no succession plan in place when they approach their retirement date.

Several articles have been written about “The Great Wealth Transfer” that is expected to happen over the coming years as Baby Boomers pass their wealth to next generations. Much of the wealth transfer involves family businesses. Many estimates place the value to be transferred between $50 trillion and $70 trillion over the next 25 years! Nearly $9 trillion, or almost half of U.S. GDP, will be transferred in the next seven years alone.

A few more interesting data points about family businesses: According to a recent Deloitte Family Business Survey, just over one-third of families agree that business objectives align with family goals, less than a third fully agree about the future development of the business, and exactly one-third would already be willing to give up control of the family business.  This survey points to the criticality of a succession plan that clearly addresses the family’s and business’ goals and objectives.

Have you created your succession plan? Many business owners we work with are so consumed by their daily work they have never taken the time to create a succession plan that will allow them to retire when they want to. Not having a succession plan in place introduces many risks and unknowns when that retirement day approaches, which can be avoided with proper planning well in advance.

What is a succession plan? A succession plan outlines how you will transfer leadership and ownership to a family member(s) (next generation), non-family member(s) on your management team or a third-party acquiring entity. This is a quite simple succession plan definition. Succession plans can be incredibly detailed and complicated given ownership and wealth transfer issues that have tax consequences. We suggest you consider using outside experts to help you, your family and the organization complete the plan. If you have an advisory board or board of directors with nonfamily members, they can be extremely helpful in this process.

Let’s start with the leadership portion of the plan. You have been the president and CEO of your family business for a long time. You have a strong management team that may consists of family and non-family members. Have you laid out the transition plan for someone on that team to assume your role? Has that individual been trained to assume your role? When it comes to family members, many times owners just assume that a child will take on the top leadership role when they retire. However, without adequate training, both outside and inside the organization, that child may not be successful in the new role. For next generation leadership to be successful they need the appropriate higher education, management experience at another company and experience at your company in appropriate disciplines (operations, sales, finance, etc.) and management. If a family member is not in the plan to assume your role, have you identified a current nonfamily manager to transition into your role? A non-family member transition to the leadership role can many times be much easier given family dynamics (multiple siblings, ownership structure, wealth transfer, etc.). However, there can be situations where family members and non-family managers are not ready for the leadership role when you are ready to retire. In some cases, a sale of the company to a third party may be the right solution.

Regarding your ownership, what are your plans? Do you plan to retain your ownership level, reduce it by passing some on to family members or management team employees, or completely sell it to fund your retirement? As mentioned earlier, ownership changes within a family-owned business can be complicated depending upon the structure. Many wealth transfer and tax related issues must be considered as part of your succession plan. It is a crucial part of your succession plan, and you should be seeking advice from outside advisors.

Let’s look at some options you may want to consider in your succession plan relative to ownership and your family’s goals.

  1. Retain full business ownership with next generation leadership. This is the hardest option, as the new next generation leadership will have to overcome “the old ways” of doing business. There are many examples of family businesses where leadership was passed on to the next generation only to be reclaimed by the older generation when they saw changes in the business they didn’t like or were not in agreement with. If you pass leadership on to the next generation, you need to trust their judgment; too many times the “older generation” takes the business back over.
  2. Retain minority ownership, with next generation or management member leadership. This is less difficult as the older generation has given up ownership control which allows the next generation or a management member to drive business results without pressure to follow “the old ways” of doing business. This allows new leadership to explore new ways of doing business to facilitate growth. The fact that the older generation has no control can also lead to conflict when they want to exert some level of influence.
  3. Retain minority ownership but bring in new outside leadership. If the next generation or the management team are not ready to assume the leadership role, then bringing in outside management with the skills and experience to drive short- and long-term growth objectives will benefit all stakeholders. It sends a clear message of change and moving in a new direction, especially if the new manager invests capital as part of your ownership transfer. This may be a great option, but you really have to perform strong due diligence on candidates to get a leader who can adapt to the culture (though not totally) and yet make changes they know are important for the future success and growth of the business.
  4. Sell the business entirely and realize the value of your ownership for retirement. If the next generation has no intention of leading or owning the business going forward, a sale of the business may be your best option. This option eliminates the family dynamics from the economic transaction and allows you to freely pursue potential financial and strategic buyers. This will require a significantly different approach as buyer due diligence and outside valuations come into play. Seeking outside advisors is critical when conducting a sale of a business. As we mentioned earlier, the historic transfer of wealth will be complemented by an equally historic number of family businesses that will invite outside owners and managers to help move the business forward when the next generation is unable to do so.

There are no cookie-cutter solutions to family business transitions of leadership and ownership. Family businesses have many stakeholders, including suppliers, customers, employees, family members, and local communities. The decisions on leadership and ownership transfers incorporated into your succession plan will affect all your stakeholders. Starting a succession plan years in advance of your retirement will give you the time to address all the issues.

Robert Silhacek and Michael Wise
Originally Posted December 8th, 2021 at Modern Castings