The next generation Featured

8:00pm EDT May 26, 2008

Many family business owners understand the importance of planning their exit strategy but struggle with how to divide up business interests among family members fairly, determine which of the qualified family members should be named as the successor, and make decisions involving when to step down and how much control should be retained.

Smart Business learned more from Scott Rittenberg, CPA and a tax principal at Tauber & Balser, P.C., about the importance of developing an effective family business succession plan.

What is the objective of a succession plan?

The objective of a succession plan is to help manage the tension and uncertainty among the children as to their financial future with the company and to outline future control and ownership of the family business. Transferring ownership can be a difficult matter complicated by high emotions. An effective succession plan can help manage these emotions by providing family members a sense of where they fit into the company’s big picture.

According to the Family Business Institute, ‘Only about 30 percent of family businesses survive into the second generation, 12 percent are still viable into the third generation, and only about 3 percent of all family businesses operate into the fourth generation or beyond. Research indicates that family business failures can essentially be traced to one factor: an unfortunate lack of family business succession planning.’

What types of advisers may be needed to help with the process and ensure a smooth succession transition?

An independent family business adviser can develop a succession plan based on what’s best for both the business’s and family’s futures. Making the process as impartial as possible will help secure buy in from the successors and other family business members. A family business adviser can help during the selection process of the successor and other key management positions.

Legal and accounting advisers should also be consulted with to determine the impact of the leadership transition on the business in terms of its legal ownership and management structure, tax liability, estate planning, retirement income and valuing the business. A psychologist skilled in family business dynamics may also be needed to facilitate difficult and emotional discussions.

What are the key elements of a succession plan?

  • Identify a successor. Ownership should be transferred to those who are capable and want to run the family business. Family members should be asked if they want to work in the business, if they would like to be a shareholder or prefer to sell. Nonfamily, high-potential candidates should also be considered.

  • Leadership preparation. Grooming the successor should take place years before the transition. Adequate time is needed to help the successor acquire the education, training, experience and skills needed to take the helm. This includes having the next-in-line work in various areas of the company, such as sales and marketing, human resources, operations, purchasing, and finance.

  • Communication. As transition plans take shape, communicate them to key stakeholders, including family and non-family shareholders, employees, customers and suppliers. Communicate about future roles, the new leader and what to expect during and after the transition. If key stakeholders are not properly communicated with, they’ll likely grow concerned and speculate about an uncertain future, possibly breaking their commitment to the company and jeopardizing the family business’s future.

  • Implementation. Educate family and nonfamily employees about their parts in implementing the plan. Involving them in every stage will help secure their buy-in and rally their support.

  • Blending. Merging the strengths of the present and future generations builds a foundation for continuity and ongoing success. Document each generation’s contribution and educate successors so they may continue to develop accomplishments.

  • Embrace change. The skills and roles of future successors as well as activities and products of the business will have to evolve. Family business members need to embrace that evolution and actively seek to change for the better.

With a well-thought-out succession plan, your family business will more likely be able to survive and thrive and live on for generations to come.

SCOTT A. RITTENBERG, a tax principal at Tauber & Balser, P.C., has more than 15 years of publlic accounting experience dealing with the tax issues of small to medium-sized businesses, with an expertise in family business, tax insolvency issues and closely held businesses. Reach him at (404) 814-4974 or