Planning Preserves Relationships, Wealth For Family Businesses

(Originally published in The Business Journal)

Family business founders invest their hopes and energy into an organization that can be a source of pride and income for the next generation.

However, the failure of a family business owner to plan for his succession can result in chaos within the company, feuds between relatives, and ultimately the end of a business that the founder invested a lifetime to build. 

Research from the University of Miami Institute on Estate Planning indicates that only 30 percent of family businesses survive into the second generation, and only 12 percent survive into the third generation. Clearly, succession planning is the subject every family owned business must consider. 

Generally, a family business is defined as one in which a family has effective control of the strategic direction of the business and the business adds significantly to the family’s assets, income or identity in the community.  More than 80 percent of all U.S. businesses are family businesses.

Why do so few family businesses survive to the next generation? A number of sources of tension in a family business impede its successful transfer to the next generation.

The biggest reason is the resistance by the older generation to retirement or its desire to maintain control after retirement. 

Second, the family business is usually the principal or only source of the family’s wealth. So even those family members who do not control the business, or who are not actively engaged in its management, look to the business as a source of income, and this causes resentment in those who are actively involved in the business.

While intra-family communication is certainly the place to start, family business owners should consider these additional steps as well:

• Get a commitment from all family members to work on succession planning.  Bringing the entire family to the table, including those not actively engaged in the business, is essential for successful succession planning.
•  Adopt a business planning process that begins with a mission statement and a strategic plan.  Develop one mission statement for the family and a second mission statement for the business.
•  Create a personal development plan for family members who work in the business.
•  Develop the appropriate governance structure with an appropriate board of directors for the business and a family forum to deal with family issues.
• Put in place the legal and financial structures to implement a succession plan.  It is important to involve the advisors for the business at the outset to avoid creating a plan that can’t be implemented.
• Create a culture in which key employees (whether they are family members or not) are expected to be owners. Properly tailored option plans will increase the value of the current owners’ holdings and may provide additional sources of capital.

With a proper plan in place, a family business can be strengthened and allowed to grow and benefit future generations of family members.

Pogue can be reached at jpogue@hhmlaw.com or at (330) 392-1541