Every family business must transition control to the next generation someday. But will the next leader be another family member — or is there a better choice outside the family circle? Successful succession plans don’t happen overnight. They take years (or even decades) of preparation, mentoring and training. So if you have borrowers that are family businesses, encourage them to start the transition process sooner rather than later.
Naming the Successor
The key operational issue addressed in any succession plan is: Who will one day lead the enterprise? For family-owned businesses, finding a successor can be difficult. Children or other relatives may be qualified but have no interest in taking the reins. Or they may want to be involved but not have sufficient experience.
To deal with issues such as these, a family business owner must take time to identify and nurture future leaders. Early on, the owner needs to select someone who he or she believes holds leadership potential and then expose the prospective successor to all aspects of running the business. When control formally transfers, this will allow the new leader to truly be seen as the “boss” and be fully capable of making big decisions. It will also minimize surprises and animosity among candidates who aren’t chosen to take the lead.
The current owner needs to provide a well-defined path for the successor and assurance that his or her hard work during the transition period will eventually be rewarded with the leadership role as well as ownership interests. Ideally, the owner also will set a specific time-frame for the transfer of control and ownership to officially occur.
Dividing up Control and Assets
Most family business owners have more than one heir to factor into the succession planning equation. So, it’s important to involve the entire family, whether or not they’re all active in the business, in the planning process. This enables everyone to understand their roles — and the financial and personal consequences of an unsuccessful succession plan.
A common issue is how to equitably divide assets among heirs when only some of them will have control of or receive ownership interests in the business. If there are sufficient liquid assets, the owner can purchase life insurance to provide for any children who won’t be involved in the business and give ownership interests only to those who will be involved. Or the owner might establish a family trust to own and operate the business, so that the entire family shares the risks and benefits.
Assembling an Advisory Team
No matter who is the chosen successor, the family business owner will need to put together a team of professionals — including a lender, an accountant, a lawyer and an insurance advisor — to guide the succession planning process. These experts can help the owner create a plan that accomplishes a variety of important goals.
For starters, the business will need to create a management structure that will survive the current owner’s departure. The business should also be on sound financial footing to ensure adequate liquidity to fund the owner’s retirement or a buyout. A buy-sell agreement is also critical in restricting transfers of ownership interests. Last, but certainly not least, the owner should consider income and estate tax issues.
Meeting these goals while maintaining a happy family life can be a juggling act. A clear succession plan requires patience, focus and ongoing family involvement. Although it’s challenging, succession planning is one of the most important tasks a family business owner will ever undertake.
Even if an owner has no plans of retiring or selling in the near future, unexpected events sometimes require the company to chart a new course. Encourage your borrowers to start planning for their companies’ future and key players. © 2014
If you would like to learn more about family business planning, contact me at email@example.com or 609-689-9700.