Fewer than one in three family-owned and managed businesses survives into the second generation.
“A major reason for this is the lack of succession planning,” says Steven Y. Patler, JD, CPA, managing director with The Prosperitas Group in Bloomfield Hills.
What will happen to your business when you are no longer around to manage it? Whether your business is family-owned and managed or owned by several partners, having a succession plan will ensure your company will continue without you. A succession plan protects your family’s and employees’ interests in the future, helps preserve the reputation you’ve worked so hard to create and builds customer and supplier confidence that your business will be around for years to come.
“If a founder dies or becomes ill and there is no plan for who will take over, the survival of the business could well be at stake. The effects on the family and employees could be devastating,” adds Patler.
Smart Business asked Patler how owners can develop effective succession plans in order to help avoid such a potentially disastrous result.
Why do owners avoid preparing succession plans?
Ninety percent of family-owned businesses are still in the founder’s control. Many founders have had control over the business as well as the family for many years and may not want to address giving it up. It is part of their identity. Rationally or irrationally, they may fear that if they let go, the business or their financial situation will suffer. Family dynamics also are involved. The founder may want to avoid potential conflicts with family members. Not addressing succession issues is a means of avoidance. Some founders may ‘fear’ retirement and don’t know what they will do with their time once they leave the business. Many owners think they don’t need to address succession planning if the business is young or if they are young. But what if they get sick or die prematurely? Finally, there is the issue of time. It’s easy to put off addressing potentially difficult and time-consuming matters, such as succession planning.
What should a succession plan take into account?
A successful plan is comprehensive and takes into account business, financial and tax aspects; employee and customer needs; and the needs, goals, dynamics and values of the family and partners. What are the values of the company’s key stakeholders? What are their financial needs? Will everyone be treated fairly? Are there possible successors the owner’s children, key employees? What are their needs and talents? Does a possible successor need mentoring to obtain the skills of a CEO? Is the business changing? Will new skills be needed in the future? Are the children and employees able to handle these changes, or will a third party need to be brought in? What about the impact on customers and suppliers?
How does one go about having a succession plan developed?
There are numerous professionals who should be included in the process. Someone, however, needs to guide the process. It may or may not be the owner, depending on his or her skill set. It could be someone who knows the business and has built trust. Frequently, it is an experienced third party who is viewed as both objective and independent. Whoever it is, this person should have a broad background, ability to collaborate with all the parties and good judgment skills.
The actual process of developing the plan begins with interviews and fact-finding. Next, all the information about the people involved e.g. goals, needs, skills and the business itself e.g. valuation, financial, compensation structure, competition, strategic plan is analyzed. Strengths and weaknesses are identified. It’s then common to hold a group session with all relevant parties. A recommendation can then be made that identifies potential successors and includes strategies in developing the skills needed by family members/ employees to lead the business. In some instances, the planning process could also result in the determination that the company should be sold and set forth what steps need to be addressed to best position the company for sale.
How often should monitoring and review take place?
At least once every couple of years. External changes, such as the business environment and tax laws, may have a significant impact on a plan. Furthermore, someone expected to take over may no longer be willing or capable of doing so or may no longer be an appropriate or best choice because of illness, divorce, etc. Regular meetings and adjustments to the plan, when and where necessary, will help ensure that the business will have the right person or persons it needs to survive and prosper in the future.
STEVEN Y. PATLER, JD, CPA, is a managing director of The Prosperitas Group LLC, Bloomfield Hills. Reach him at (877) 540-5777 or email@example.com. For more information, go to www.prosperitasgroup.com.