Succession Planning for Family Businesses

By Tom Zucker, President

The majority of family-owned businesses are unprepared for the transition of leadership and control that is inevitable. Many owners feel infallible, ageless, and frankly that they will have time to address these matter at a later time. Unfortunately, the time never comes until an event prompts action. The outcome for the family-held business and their employees is less than ideal.

The industry is littered with statistical evidence of the unprepared family business owner:

• PWC’s 2021 Global Family Business survey concluded that 66% of businesses don’t have a succession plan, and that 47% of family business owners who expect to retire in five years don’t have a successor.
• Young Presidents Organization (YPO) states “Without an effective plan for succession, more than 85% of family businesses fail by the third generation and over 95% fail beyond that.”
• Numerous family business centers websites indicate that the majority of family businesses have ineffective communication between generations on the importance of succession planning.
• Almost 40% of family business owners aim to retire within the next decade, according to MassMutual’s American Family Business Survey.

The importance of succession planning needs to be a strategic priority for any company with ownership in excess of 50 years old. The leadership in charge of family held business must make a directed effort to plan for succession. The succession planning needs to be integrated with the company and family’s long-term objectives. A written and well communicated succession plan is essential for strategic alignment to help enable a company to thrive into the future.

With market uncertainty, business owners must approach succession planning strategically. Here are three considerations that are critical to maximizing your company’s value and achieving the exit strategy that best suits both your family’s and the business’s needs.

View The Business as a Buyer

Owners must view the company as a buyer would and prepare to present the business’s full potential to prospects. For example, experienced buyers value aligned and capable leadership teams.  Does your succession plan engage and motivate the leadership? Sellers will need to present the company in the best light possible.

Share the Succession Plan

Preparing a succession plan is important, but sharing the plan with key leadership and family is ideal. Whether the plan is to transition the business to a family member, or sell to an outside party, the various stakeholders need to be part of the transition planning process.

Know Your Options

For many businesses, a transition within the family or to management is ideal, but for many companies this is not a realistic option. A transition within the family obviously depends on the skills and interests of the next generation. But owners must also consider the competitive landscape of their industry and what the operating environment will look like for their successor. For instance, industry consolidation trends could change the viability of the company for the next generation, especially if the business must assume a high amount of debt to pay out the current owner’s share.

Proper succession planning sets businesses apart because the majority of family-owned businesses are unprepared for the transition of leadership and control that is inevitable.  By focusing on these suggestions, owners can achieve the best price and terms for their company and position their business and family for future success.

© Copyrighted by Tom Zucker, President of EdgePoint Capital Advisors, merger & acquisition advisors. Tom can be reached at 216-342-5858 or on the web at www.edgepoint.com