The transition of a family owned business from one generation to the next is one of the biggest potential challenges that both the business and the associated family will face. The Family Firm Institute estimates that only 30% of U.S. family firms survive the shift to the second generation, and only 12% are still viable in the third generation and only 3% make it to the fourth generation or beyond1.
The lines among Family, Business and Ownership are often blurred in a family business which makes transitions highly emotive and complicated on all levels. Founders often get caught up in the day to day running of the business and find it hard to make time to plan for the future, and the next generation in a family business often defers to the senior generation for guidance on these issues, and may not be plugged into the financial implications of what it takes to assume the ownership. Succession occurs more smoothly when successors are better prepared, when family relationships are based on trust and are cordial, and when there is planning for tax and transfer issues2.
Below are some questions that a lot of family business owners have difficulty answering, but can be successfully addressed through appropriate succession planning:
- How would the death or disability of an owner or key employee of the family business impact the sustainability of the business?
- Have the founders planned for retirement, both financially and in lifestyle preparation? Are their secure sources of income outside the business?
- Have the owners assessed their potential tax exposure triggered by a transition? Has the business been professionally valued?
- Has a successor(s) been selected? Are there the proper legal documents in place to support this?
- Are there disagreements among owners, family members and non-family executives as to what would define a successful transition to the next generation?
- How is the communication among family members involved in the business, and those who are not involved in the business? Do they have different goals in transition?
These questions just scratch the surface of the uncertainty which may be bubbling up beneath what may currently be a thriving family business. It is best to address these issues up front rather than to let them fester.
1 Family Firm Institute, “Global Data Points”, http://ffi.org/default.asp?id=398
2 Morris et al., 1997
