The pandemic had one positive effect on family businesses: More of them developed formal business succession plans. That’s according to PwC’s 10th Global Family Business Survey. The report says that 30 percent of the family firms it polled now have a formal plan in place, up from just 15 percent in the 2018 survey.
Perhaps it shouldn’t be all that surprising that so many family-owned small businesses lack a formal plan. Creating a succession plan requires having difficult discussions around emotionally fraught family dynamics:
- Should your son or daughter be groomed to take over the helm, or should it be a non-family member?
- Should you just sell and split the proceeds?
- What if the company you founded and devoted your life to building goes in a different direction once you retire?
Despite widely quoted statistics that say that only 30 percent of family businesses successfully transition to the second generation and only 13 percent survive through the third generation, a Harvard Business Review report says that is not true.
Instead, the report says, family businesses tend to be more successful over a longer term because entrepreneurs value “long-term survival above short-term profits…. Rather than being obsessed with hitting quarterly earnings targets, as public companies are, family businesses tend to think in terms of generations, which allows them to take actions that put them in better position to endure the tough times.”
Creating a family succession business plan that envisions long-term success of a company run by future generations can be daunting.
Get started by asking yourself these questions.
What are my goals for the company?
Do you want a company that stays under the family’s control to build inter-generational wealth? Do you want to continue to have a say in how the company is run? Or do you prefer a transfer of ownership to someone outside the family so you can go out on top?
Is selling the family business the right thing to do?
This is a very personal choice — and it involves much more than emotions, succession issues, and the hurt feelings of the younger generations. There are estate planning, tax planning, and retirement planning issues to consider.
And then there is your own emotional attachment to the company. Are you ready to let go of this amazing thing you built over a lifetime?
Who might want to buy my business?
Exiting from the business by selling to a strategic partner, non-family employees, or an investor like a private equity fund is doable. Depending on your goals, some buyers will take full control, buying you out, while others might take a minority interest or provide ongoing dividends to you and your family.
An exit plan that involves sale or merger requires a high level of organization and may entail investing in improvements to make the business and its assets appealing to a buyer.
Family business owners should start preparing for sale now, even if a potential exit is years down the road. Owners want a business valuation that allows them to reap the reward for all of the hard work, time, money, and sacrifices they have invested into building that company.
But the reality is that buyers often find issues that push down the purchase price.
Deploying an Interim CFO from InterimExecs’ Rapid Executive Deployment Program with experience in prepping companies for sale can help set a company up to get maximum value by making operational, financial, or technical improvements now.
Or you can bring in an interim CEO like family-owned packaging manufacturer, Styrotek, a California-based company, did in 2016. The company, founded by a group of grape growers in 1973, was in a state of chaos, suffering extraordinary losses and issues from bookkeeping to operations to broken machinery. The family discussed closing the doors, but the idea to bring in new leadership won out.
The interim CEO dove in, assessed the business and created an action plan. Within three months, daily and weekly production volume had reached the highest point in company history, production costs fell by 20 percent, and overhead reduced by 31 percent ― all while saving 150 jobs.
Who are my potential successors?
This might be the most emotional of the decision-making processes you’ll go through in determining the future of the business. Among the questions to address:
- Do you have more than one family member who wants to take over? Or is no one interested?
- Is the next generation of your family actually capable of taking over business operations? And is your vision for the company in sync with theirs?
- Do you want to continue to be a contributor and have some hand in running the company?
- Are there some members of the next generation who should be managers and some who just own shares?
While this is inherently a family issue, having outside advice can help with such difficult decisions.
Business leaders often find that bringing in an outside executive, such as an Interim CEO, to provide an unbiased assessment of the business can provide clarity. An experienced executive will go through 360-degree feedback, leadership assessments, and even a look into how each family member might envision a strategic plan for the business. Laying out the facts is a powerful place to start.
Is my chosen successor ready to take the reins?
Having the difficult family business succession planning conversations earlier in the company’s history allow you to identify the future leaders and begin the grooming and transition process. But, it’s never too late to start planning for management succession.
This is another time when outside help can be instrumental to success. An Interim CEO with extensive management experience can focus on mentoring key employees and family members to the point where they are ready to step up and lead.
What will I do once the company transitions to new leaders?
Are you ready to spend every day on the golf course? Good for you! You earned it! But if you’re not quite ready to fully let go, the succession planning process should include a section that fully spells out the role you will play in the future success of the company so all of the stakeholders know what to expect.