We strongly believe in the power of succession planning for any small business, but it’s especially important if the entity is family-owned. When multiple generations are involved in the business, there is an added layer of emotional stress that can sometimes complicate things. According to PwC’s 2021 Family Business Survey, only 34% of family-owned businesses have a “robust, documented and communicated succession plan” for the company.
Beyond the documentation of a plan, a successful succession also involves managing financial trends, margins and controlling costs to secure the highest price for the business. Regardless of whether the business sells to a family member or a third party, a succession planning strategy should also be focused on organized financials, along with a strong identification of the market. To sustain the company and ensure the business thrives for years to come, a proper exit plan will be imperative. We’ve identified several significant things to keep in mind when it comes to planning for the future of your family-owned business.
Start planning early
While it may seem like the transition of power within a family business is years away, planning now is the best strategy. It can take years to ensure that the next generation is fully trained and experienced enough to take over. By starting the conversation and preparation now, business leaders will have ample time to brainstorm, document and execute their plan. As we trek through the ups and downs of the global pandemic, it’s evident that having a plan in place is non-negotiable. Recent data reveals that only 56% of family-owned businesses agree on the future direction of the company.
Another challenge of delaying your succession planning: parties involved are waiting until late in the process to determine the structure of the transaction and how they are going to pay for it. That can lead to unsuccessful succession scenarios due to buyers being unprepared to make down payments, potentially bad credit history, weak personal balance sheets, etc. If they understood the expectation earlier, they could’ve taken proper steps to be a quality loan candidate. The planning applies as much to the buyers as it does to the sellers.
Timely planning also ensures your offspring have the know-how to run the businesses properly. For those business owners with younger adult children, they’ll likely want and encourage their potential successors to gain outside experience before they join the family business. This builds additional skillsets, increases self-confidence, and shows other key employees that you’re not just “handing over the keys” of your business to your child. It’s a way to provide an additional layer of credibility for your offspring when they join the company.
Work with a family business advisor
Writing a succession plan is a process, not a singular task to knock out in a day or a week. While it possibly could be done in-house, it’s advisable to bring in outside parties to assist. To protect the integrity, legacy and assets of the business, experts can help. Family business advisors have the unique perspective and expertise to handle some of the most sensitive and complex issues that may arise while planning. From legal and financial matters, to ensuring the company’s mission, vision and values are aligned with strategic goals, a family business advisor can help identify and mitigate risks. An objective third party like an advisor will likely help uncover opportunities, document a roadmap and safeguard the future of a family-owned business.
Embrace change and keep an open mind about the future
Tradition can be the bedrock of a family business but be aware that it can also be a barrier to growth and evolving the business. As younger generations move into the workforce, leveling up the company’s digital capabilities will be key to attracting and retaining talent. In PwC’s 2021 survey,1 only 42% of family-owned businesses said they have strong digital capabilities. Just one-third1 have documented a comprehensive strategy for “digital transformation, an essential tool for achieving digital goals.” Beyond digital capabilities, there’s an opportunity for family-owned businesses to prioritize ESG initiatives. 45% of businesses believe2 they can lead the way in sustainable business practices. Additionally, this can be another element to increase employee engagement. While these considerations are not directly tied to documenting an exit plan, they are reminders that the family-owned business must keep their proverbial finger on the pulse to sustain themselves for future generations. The formula for success can change as time passes, so being open to fresh ideas and an innovative approach will keep the operation moving forward.
Conclusion
Those in leadership roles at a family business should act now if they have not already started a succession plan. By fostering the succession dialogue with both family members and non-family stakeholders, the process can be an ongoing collaboration between the company’s key people. Succession planning can be complicated and intimidating, but it’s a necessity to guarantee the business’s ongoing legacy for decades to come.
