Succession Planning in a Family Business: Benefits, Challenges, and Guiding Principles

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The pandemic has made it clear that all family businesses should have a long-term succession plan, since circumstances can rapidly change in ways that are beyond the control of any family. While most family business leaders have an informal succession plan, only a fraction of them have documented the plan and effectively communicated it to all parties involved.

Sixty percent of U.S. respondents to PwC's 2021 Family Business Survey believe that family members increased their discussions concerning the business since the start of the pandemic. Still, the same survey shows that only 40 percent of the respondents believe the pandemic strengthened communications across generations of family members.

This is concerning since family businesses that have not yet started planning for succession can be susceptible to numerous risks—including broken relationships, a successor who does not have the knowledge and/or capability to lead, and reluctance from stakeholders. This planning should be done as early on as possible, though it is not too late to start now if your family business is more mature.

Benefits of Planning

Succession planning is key to achieving a long-term legacy in a family business by, among other things, defining when family members may work in the business, how profits should be distributed, who may serve on the board, how to plan for future leadership, and other matters such as taxes, liability, estate planning, ownership stakes, and voting rights. If a family business leader suddenly wants to leave the business or unexpectedly becomes incapacitated or passes away, the business needs to have the ability to remain stable during such unpredictable times.

There are several benefits to long-term succession planning. One is that your child or children will have the time to learn management tasks and you will be able to see how they perform. You will be able to mentor your child or children through the entire process and see if they are ready for the new role. Another benefit of succession planning is that it enables family members to make informed decisions about their futures within the company.

Challenges

Although succession planning comes with many benefits, there are certain challenges that may arise. First, family business leaders must decide which child or children will be running the business and when in the future that will occur. This can be an emotional process and have repercussions for both the business and your family.

Another challenge is the diminishing interest of younger generations towards working in the family business. According to a 2016 survey by PwC cited by Forbes, of those anticipating an ownership change within five years, only about half plan to keep the business in the family—down from three-quarters just two years prior.

Guiding Principles

When it comes to succession planning in a family business, there are some important guiding principles that may be beneficial.

First, start as early as possible: planning well in advance allows plenty of time to mentor potential candidates and consider external talent that can be brought in and trained, if needed.

Second, articulate important family and business goals: everyone should feel heard, and a more beneficial outcome is likely by having an open conversation where family members can communicate easily and candidly with each other.

Third, clearly define the roles and rights of all stakeholders in the succession process. And finally, actively communicate the succession plan with all key members of the business.

Succession planning in family businesses is often a difficult and emotional process. Early planning will likely alleviate some of the stress that comes with the process, as well as give the family business a greater chance at generational survival.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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