The long-term success of any business is dependent upon how well the torch is passed from one generation of leaders to the next. Succession planning for family owned businesses is uniquely challenging.
Family businesses are unique. Close relationships and heightened emotions add complexity to the process. Fortunately, with the right strategies, a family-owned business can achieve a smooth transition to a successful future.
Defining Roles & Identifying Successors
In many ways, family business succession planning resembles standard succession planning. However, a key difference for family-owned businesses is the need to consider family dynamics and how they influence the process.
The initial main steps include securing buy-in from all family members involved in the business and selecting the right successor. Here are some of the essential components at this stage:
- Gather the family and have a discussion. The current family business leader(s) should start by calling a family meeting. The main purpose of the meeting is to help everyone understand the importance of creating a succession plan. This meeting should include plenty of time for discussion and encourage everyone to share their opinions.
- Set clear goals. Once the family agrees, the next step is to define the aims of the succession plan. In a family business succession plan, goals usually include overall business targets and focus on maintaining the family's well-being.
- Assess potential successors and identify leaders. Like traditional business succession planning, family businesses should conduct a talent review to find the most suitable individuals for leadership roles. This process often includes talent mapping and building a strong leadership pipeline to ensure a steady flow of capable candidates. Here, current leaders evaluate both the skills and long-term aspirations of next-generation leaders, as well as define their roles and responsibilities.
Depending on the leadership structure of a family business, some members may hold an ownership title, while others assume management roles. These two types of roles are fundamentally different.
In some cases, a family business owner may divide ownership shares equally among each child. However, one child might be responsible for overseeing daily business operations. It's important to clarify these details to ensure roles are well defined. Seeking advice from financial and legal professionals can provide guidance on the best approach.
Preparing the Next Generation
Just like in a traditional succession plan, family-owned businesses need to outline how they will prepare the next leaders. The key here is to start as early as possible.
The advantage of starting early is that it provides plenty of time for knowledge transfer, or passing down essential information from current leader to successor. Let's review some best practices:
- To build their experience, get successors involved in key business operations. For example, have them run payroll, manage key account relationships, or maintain inventory.
- Include identified successors in all strategic planning and decision-making processes. Getting them familiar with these areas prior to the transition provides them with the confidence to manage them on their own.
- Although it may be difficult, current leaders should gradually give up their control over key business practices. Letting successors take the wheel before a leader officially steps allows them to be as prepared as possible.
Research shows that 25% of failed transitions happen because an heir wasn't properly prepared. For a family business to succeed long-term, ensuring successors are well-equipped to take over is key. It's also important for leaders and successors to agree on their definition of readiness.
Families should also engage in conversations around shared values and how they want to leave a legacy. These talks can help bridge the generational gap between family members. Research also shows that families who write down their values are more transparent, communicative, and better prepared for succession.
Managing Family Dynamics
When creating a family business succession plan, conflicts can occur because of family dynamics. Although it's not possible to completely eliminate tense moments, there are ways to consider each person's perspective and ensure everyone is treated fairly.
One of the main sources of conflict in family-owned businesses is selecting the next leader. These choices often carry strong emotions. Therefore, it is essential to involve all key decision-makers in the process and promote open, honest communication.
Here's how to manage family dynamics during family business succession planning:
- Involve everyone from the start. When a succession plan is first created behind closed doors, tensions may arise when it's presented to the rest of the family. Getting everyone involved early is a great way to mitigate conflict.
- Hold frequent, open discussions about each family member's skills and interests. This helps create buy-in when choosing a successor.
- Let family members determine their roles in the planning process. Some may be content sitting on the sidelines. Others may want to be involved in every detail.
- Be honest about whether you have the right talent in the family to pass the torch. Sometimes, for the benefit of the business, hiring from outside or selling might be the best option.
In family businesses often have relatives in their roles because of their connection to current leaders. Some family members may believe they are entitled to succeed, but they might not be the best choice for leadership. Including all family members and promoting open communication helps reduce misunderstandings.
Your Succession Planning Timeline
A family business succession plan timeline will vary depending on the unique needs of the business. For some families, a year is sufficient. Others may need several years before they feel ready. If you’re looking for a more structured framework, explore our Step-by-Step Guide on the Succession Planning Process for detailed instructions on each phase. Regardless of how long it takes, the key is truly in starting as early as possible.
As an example, here's a general timeline framework:
- Early Planning Stage (5-10 years prior to transition): Identify key roles and assess skills of potential successors. Hold family discussions. Define the long-term goals of the business and determine desired outcomes. Provide ample training and development opportunities to prepare successors for leadership.
- Transition Planning Stage (3-5 years prior to transition): Choose successor/s based on skills assessments, experience, and leadership potential. Begin transitioning leadership responsibilities to future leaders while still providing guidance and mentorship. Identify any estate planning needs. Continue to communicate openly with the rest of the family as the plan progresses.
- Execution Stage (time of transition): Make a formal announcement about your succession plan to all key stakeholders. Complete the transfer of responsibilities from current to future leaders.
Regardless of how smoothly a family business succession plan runs, there may be a level of uncertainty when it's time to pass the torch. To cut down on anxiety, remember to remain transparent. Keep the lines of communication open and ensure ideas and opinions get the appropriate air time.
Family Business Succession Planning: Additional Considerations
Outside of the formal framework of a family-owned business succession plan, there are several other nuances to consider:
- Legal and financial considerations: Tax planning and ownership transfer are two added elements in a family business succession plan. Work with an experienced professional familiar with gifting shares, setting up trusts, and getting the right tax strategies in place. They can also assist with handling buyouts for any family members not involved in business operations.
- Non-family employee concerns: Leadership transitions from current leaders to heirs may cause fear and doubt in non-family staff members. To alleviate their concerns, include them in your succession planning process. While they may not play a key role in decision-making, it's crucial to obtain their buy-in and support.
- A lack of suitable successors: Some family businesses won't have members interested in taking over or lack the right skill set or ability to do so. In these cases, it's important to explore other options, like hiring externally or management buyouts.
- Contingency planning: Unexpected deaths in the family or an identified successor's unplanned departure could change your entire succession plan. For these reasons, it's important to consider these events and put a contingency plan in place to ensure a smooth transition.
- Succession plan updates: Whenever there are key changes to the business, make sure they're included in your plan. Economic shifts, new business goals, and key staff changes should all be accounted for.
Unleashing the Potential of Your Organization
In a family-owned business, succession planning is crucial for maintaining business continuity. When roles are clearly identified, family members feel seen and heard, and processes are in place to prepare future leaders, passing the torch becomes seamless and pain-free. Learn more about the universal benefits in Why Succession Planning is Important for Every Organization.
Looking for more succession planning best practices for your family-owned business? Connect with us or consider attending one of our upcoming leadership events.