Planning for the succession of a family business can be time-consuming and difficult, especially when issues of family dynamics come into play. Just making the decision to turn the business over to the next generation, rather than selling it to a third party, can be agonizing. Once that decision has been made, selecting members of the next generation to run the business takes a fair amount of time and planning.
Once developed, family business succession plans should be monitored and revisited over the years as the business and family dynamics change. It is important to understand that succession planning for a family business takes time, and careful consideration can help avoid conflict within the family, says Stephen C. Zivitz, a partner in the business department and chair of the Tax, Pensions and Estates Practice Group at White and Williams LLP. “There is an old saying that succession planning is a journey, not a destination,” he says. “It must constantly be re-evaluated as the family and business dynamics change.”
Smart Business spoke with Zivitz about the importance of succession planning for a family business and how the issues differ from nonfamily businesses.
How common is it for owners of family businesses to neglect succession planning?
I don’t see a lot of neglect, but I do see recognition that the decisions are difficult and time-consuming. There are basically three clusters of problems for family business owners to consider: whether to sell the family business to maximize value; who in the next generation will be selected to run the business if it is retained; and how to compensate family members who are not participating in the business. Each of these decisions can be difficult and can take some time for the business owners to think through.
How does succession planning differ between a family-owned business and other types of businesses?
In a nonfamily-owned business, decisions are generally made based purely on economics. In a family business, owners often make accommodations for the benefit of family members and do not necessarily try to maximize shareholder value. Additionally, family business owners need to consider the complexities and planning implications of death taxes as well as compensation for family members who are not active participants in the business.
When should owners of a family business begin succession planning?
As soon as possible particularly if there are multiple owners in the current generation. In that situation, a buy-sell agreement is a must. It is important to remember that succession plans will often change over time. It is ultimately a result, but it is as much a constant re-evaluation and analysis as it is a target.
Succession plans need to be periodically reviewed and adjusted to meet any changes in the business and family dynamics. Members of the next generation who are under consideration to run the business in the future should be given as much time as possible on the job to learn and perfect the necessary skills.
How can owners of a family business objectively plan for succession?
This can be one of the greatest challenges facing a family-owned business. It is probably not possible to remain completely objective when it comes to succession planning, particularly when there are multiple business owners from the current generation, each with their own family members who may or may not be under consideration to take over the business.
In my view, it is not critical that individuals in the next generation who are in contention to be the owners are the best persons available. However, they must be capable, interested in running the business, and ideally the best among multiple competing family members.
How do family dynamics affect succession planning for a family-owned business?
Most of the problems that I see fall into two basic clusters of issues.
First, there is a perceived need to be fair to all members of the family, particularly those who are not involved in the business. However, fairness is often difficult to achieve due to differing perspectives. As a practical matter, those not involved in the business may have to receive less in order for the business to remain in the family and survive.
Second, family relationships and perceptions may have to be overridden when designing a success plan. For example, it may be natural to assume that the oldest child will be tapped to take over the business; but a younger sibling, or even a sibling’s spouse, may be more capable and/or more interested in doing so.
STEPHEN C. ZIVITZ is a partner in the Business Department and chair of the Tax, Pensions and Estates Practice Group at White and Williams LLP. Reach him at (215) 864-6240 or firstname.lastname@example.org.