Data shows that while more than 90 percent of businesses in the United States are family-owned, 70 percent of these businesses fail in the transition into the second generation; and 85 percent fail at the third-generation level.
Smart Business spoke with Jason Cain, head of Barnes & Thornburg’s Chicago wealth management practice, about the importance of creating a business succession plan.
What are the first steps to creating a succession plan?
The first step is for the business owner to admit that he or she will eventually retire and die. This may seem laughable, but its true that many entrepreneurs don’t believe it will ever happen to them.
Once you get a business owner to face this reality, the next step is to take a hard look at what the business is going to look like once the owner is gone. Does the business owner plan to retire, and if so, when? Will the business stay intact with the next generation running it, or will it be sold?
If the business owner plans on handing the business down to the next generation, intense succession planning is needed. Business owners need to realize that a succession plan isn’t a document set in stone and filed away until it’s needed.
Succession planning is a process that is similar to the way a business evolves. It is a unique combination of business planning, tax planning and family psychological planning.
When is the best time to create a succession plan?
A good rule of thumb is to start about 10 years before you think you want to retire. By five years out, you ought to have a succession plan in place. The plan needs to include all your expectations and goals for the company. You need to share that information with your family members and others in the company you are grooming for succession.
How difficult is it to separate family and business in order to create a good succession plan?
It is very tough to segregate those issues because of the nature of families and the desire for senior members not to hurt their children’s feelings. They naturally want their children to succeed. But there will always be a day of reckoning.
Business owners need to take a hard look of what is good for the business. And it is critical they separate family issues from business issues. It may even mean removal of family members from the company in order for the business to remain successful.
In a good succession plan, all employees — even the children — are evaluated at every stage of life in their careers.
How can senior members ease the burden of making those difficult decisions?
If senior members can take a little bit of the pain upfront and be honest with family members who are in the business about their roles, responsibilities and expectations, it becomes less burdensome to those left behind. While that means some toes will get stepped on along the way, from my perspective that is better to deal with when the business owners are alive rather than when they are gone.
With no succession plan, what often ensues is an intense power. Not to mention the erosion of family harmony and the shift of energy away from the successful management of the business.
What advice can you give to businesses looking to set up a good succession plan?
Business owners don’t need to go through it alone. There are many professional to help guide businesses through the process, such as consultants, advisers, accountants, estate-planning attorneys. An outside board of directors may also be helpful in providing unbiased advice.
Business owners also need to be clear and keep the lines of communication open with employees. If you have children or key employees and expect to transition the business to them in 10 years, let them know this. These people need to understand the role they are being groomed for and they need to be a participant in this process if it is going to be successful.
Tax planning is also an integral part of succession planning. There are many tools available that can ease the estate tax including long-term gifting strategies, sales transactions, employee stock option plans and charitable giving. All these need to be done while the business owner is alive.
Jason M. Cain is the head of the Chicago office’s wealth management practice for the law firm of Barnes & Thornburg LLP, a large Midwest-based law firm. Reach him at (312) 214-8337 or email@example.com.