Family business succession planning Featured

7:00pm EDT December 27, 2005
Privately held family businesses account for 60 percent of the total employment in the United States and 78 percent of all new U.S. jobs. But as the baby boomer generation approaches retirement age, are they ready to pass the torch to their sons and daughters?

While most family business operators believe the concept of future leadership is important, very few have developed the necessary leadership and training plans to ensure their family business survives to future generations, says Mario O. Vicari, a CPA who heads up the family business practice at the Horsham, PA-based accounting firm, Kreischer Miller. “Creating a plan is more complex than people think...but without one the outlook for the future of a family business can be grim. It often means the company may not survive after the older generation steps down.”

Smart Business spoke with Vicari about the importance of creating a family business succession plan and how business owners can take steps today toward creating strong succession leadership.

 

What are the critical steps to ensure a successful family business succession plan?
The very first step is to recognize the complexity of what a succession plan means. Most people confuse it with a transaction, like selling stock, or a tax matter. In reality, succession planning means preparing successors for leadership.

Business owners have to get clear about their future and the future of the business. This is a difficult thing to do because this involves making hard choices about when you plan step down, if you plan to sell the business or pass it on to family.

If a business owner decides to pass on their business to the next generation, the next stage in the process can be fraught with emotion, because the owner needs to make an evaluation of family members and who is best suited to lead. Many business owners can’t get past this step because of the emotion associated with it.

Many family issues can arise, such as sibling rivalry. This step needs to be handled carefully and is best handled with third-party involvement so relationships are not destroyed.

 

How ready is this generation of baby boomers to hand over their businesses to family members?
A survey of family-owned businesses in the region found that half of family businesses didn’t have a formal succession plan at all. These baby boomer business owners are fast approaching retirement but many have not done the hard work of succession planning that is necessary. And time is running out.

Creating a strong succession plan is a long process; it can take 10 years or more. A business owner at 50 who wants to retire in 10 to 20 years needs to start the process today. Of course, even with a succession plan there are no guarantees that the next generation will be ready when the business owner steps down, but doing nothing is a recipe for ineffective transition.

 

What are the challenges to creating a succession plan?
The biggest challenge for family business owners is facing the difficult decision of what is best for their business versus the natural feelings they have for their family members. It is hard to handle hurt feelings and hurt relationships. When feelings get in the way, the business owner tends to avoid confrontation rather than do what is best for the business.

 

What advice can you give to businesses looking to set up a successful succession plan?
Start early and get good counsel from someone who understands family businesses. Families that manage succession well recognize that are three distinctly different aspects to a family business: management, ownership and family. Problems occur when there aren’t clear boundaries around these three issues.

One good way to help establish these boundaries is to form a board of directors. This serves as a way to not only have another body helping to drive the company but it is an excellent way to separate some of the emotional aspects of running a family business. In other words, the burden of the decision-making will not fall entirely on the senior generation family members, because there is a board of directors there to assist and provide counsel.

Without clear boundaries between management decisions, ownership and family, these boundaries become blurry and can create chaos. Conflict is inevitable in this environment and relationships are under stress all while these people are all trying to work together and make decisions. It is like a perfect storm. Without a plan the family could lose the business and destroy relationships.

 

 

Mario O. Vicari is a CPA and heads up the family business practice at Kreischer Miller, www.kmco.com, an accounting firm based in Horsham, PA. Reach Vicari at (215) 441-4600 or mvicari@kmco.com.