Why Your Family Business Needs To Consider Succession Planning
Running a family business has never been more challenging and COVID-19 has shown us that creating a succession plan that incorporates governance, communication and a clear vision for legacy preservation is essential. It is imperative for family enterprise leaders to be asking the tough questions:
- What do we do if something happens to our CEO?
- Is the next generation ready to take over the business?
- How will the business be funded?
- How will we support our shareholders?
- Do we agree on a vision and legacy plan?
Companies who are able to answer these questions are the most resilient and will be able to weather the day-to-day challenges more effectively.
Overcoming Existing Challenges
Prior to the pandemic, family businesses found it difficult to endure beyond one or two generations. Statistics from EY Family Enterprise Services, a division of Ernst & Young, the international accounting firm, suggests that more than 65% of owners want to make this transition to the next generation but fewer than 25% are actually successful. Breakdowns in trust and communication within the family, lack of adequately prepared individuals and a lack of family purpose that defines how to use wealth are some of the most common reasons for this occurrence.
Transferring leadership from one generation to the next can be complex and many businesses leave planning for this until it is too late. However, the world’s largest and most successful family enterprises show that it can be done, with most having a clearly identified succession plan outlining individuals who will be responsible for this process. By having a clear vision and process for leadership transitions, these businesses are more likely to overcome adversity and build long-term stewardship.
Making the Right Plans
Research suggests that over 75% of companies will see leadership transitions over the next decade, with the COVID-19 pandemic reinforcing the need for effective preparations sooner rather than later. Both short-term and long-term contingencies should be accounted for should anything happen to the current CEO. These plans should include:
- Clear definitions for who is responsible for the succession planning process.
- Plans to develop an ongoing and consistent system.
- A plan to account for market disruption.
- A team to support execution.
Succession planning allows businesses to account for now, along with planning for what comes next. It is built around leadership, ownership, legacy and values, and wealth transition to include both family and business considerations.
- Leadership – who should lead the business going forward? Is the current CEO or owner willing to transfer control?
- Ownership – Who owns the business after the current leader retires? Should ownership be limited to only those involved with the company?
- Legacy and values – What are the family’s current values and how confident are you in the next generation to uphold these?
- Wealth transition – how will wealth be shared among the family members? How will the current owner remain financially secure after transferring the business?
Family vs. Business Considerations
When a business supports a family, making plans to safeguard continuity and protect against economic uncertainty is vital. Family considerations must include long-term annuity, life insurance and how goals will impact both active and inactive heirs. It is also important to consider how much the senior generation will need to live on once the business has been transferred. Governance is also important to consider and the legacy that the founders were aiming to achieve should be taken into account. This will help provide guidance in times of uncertainty. All family members involved in the business and company stakeholders should be kept apprised of all changes to succession and governance, with opportunities to review documents that relate to this in order to prevent surprises and minimize disruptions.
To ensure consistency in operations, establishing controls and clearly defining roles, duties and responsibilities will be necessary. Not only in the uncertain times of a pandemic but also in the day-to-day operations of a business in challenging times, this concept is crucial. Liquidity is also another risk to think about, particularly if shareholder needs conflict with the need for capital in the business. Although the pandemic and subsequent economic turmoil have created a race to secure liquidity, it is important to continue looking at options that align with your objectives and priorities once the dust settles. Additionally, family businesses should look to find ways to enhance performance beyond current levels. Benchmarking against similar organizations to identify areas for improvements or cost reductions can be beneficial.
Prepare for Unknown Eventualities
A strong succession plan allows a family business to continue operations in a productive way long-term and offers guidance for handling and moving past obstacles to emerge more resilient. Anticipating future disruptions can help to stabilize uncertain times, while periods of economic recovery are a good opportunity to ensure that leadership and governance systems can withstand whatever may lay ahead.
Interested in building a strong succession plan for your family business? Contact the principal or senior manager at BSSF responsible for your services or a member of the BSSF Family and Closely Held Businesses committee.