Certain things need to be taken into account before a family business can become a beneficial legacy for those it was built for. The necessary steps to create these types of legacies are often avoided until it's too late. Multigenerational succession planning is a common obstacle faced and put off by family-owned businesses in today's marketplace.
When heirs come into play, it can be challenging to navigate ownership succession. It's safe to say, the more heirs a family-run business has, the more complicated the process may become. It's not uncommon that the industry's needs, goals, knowledge, and involvement levels vary widely between each heir. Couple those differences with different communication styles and significant obstacles may arise. These types of barriers can cause a business to fail and leadership styles to create irreversible conflict.
Of all things to do for successful succession planning, communication is the most important. The communication needs to start while the active founders are still running the company. Having a foundation that the founders laid by pre-planning will help the transition when it's time to allow the heirs to weigh-in and share their concerns and goals.
It's never a bad idea to bring in a third party with no affiliation to the family. It's not uncommon for one heir to hold the business in high regard while another wants to spend the money they can get from it. Some of the most robust dynamics we have seen are a combination of family and non-family partnerships. The U.S. GDP currently has 64% of its privately owned businesses categorized as family businesses. Only 40% of those have detailed succession plans in place. The majority of those plans will not end up being successful transitions.
The desire families have to create a legacy for their children's future is a big goal in American families. The issue is that not all of these families take the necessary steps to address proper succession planning. Instead of securing a successful company, they risk it being run into the ground and failing.
Here's what can happen when a founder gives up control of a company:
- The business continues to be profitable and more successful after the heirs take over.
- The business will continue to generate wealth as it always has no more, no less.
- The family business has too much conflict during the leadership transition, and the company fails.
One thing is for certain, the experience an individual needs can not be taught. If one of the owners is a non-involved owner, the business conversations can be unpredictable. What to do with cash flow can become an ongoing point of contention. One heir may want to build the business, reinvest the profits, and push way harder than the other(s). Families get destroyed over the lack of succession planning, just like companies do. The employees, clients, and heirs all need to be protected by proactively planning for succession transitions. The end game is to be fair to the heirs while also covering the business needs.
The truth is most of the documents that pertain to this type of illiquid asset treat all of the heirs equally. One recommendation is to intertwine estate planning and business planning. Intertwining these two factors can help avoid the "blind" equity that could negatively affect the business's profitability.
You may ask yourself when will the next generation be ready? The way to answer that most efficiently is to make sure the next-gen does the following:
- Gets a degree
- Gets experience in multiple companies
- Finds their dreams, passions, and goals and make sure those align with the business.
No time is soon enough for succession planning. With so many factors to consider, it is easier to do so over time rather than in a rushed or unplanned manner.