Planning Ahead is Key to Family Succession

Eighty-eight percent of family business owners believe their relatives will maintain control over the business five years after passing on the torch; however, statistics show otherwise. Less than one-third of family businesses survive into the second generation, and just 12 percent remain in the third generation.

Even among well-intentioned families where the next generation actively wants to inherit the family business, pitfalls arise. Learn the top three reasons family business do not survive transition — and how to plan around them.

There is no plan in place

The main hurdle for businesses failing to transition is simple yet devastating: No one properly plans for succession. In today's economy, business succession planning is critical. The best thing entrepreneurs who want to pass on the family business can do is to start planning early and revisit their plans often, seeing business succession planning as a process and not an event.

Yet this necessitates delving deep into prickly issues, such as how to treat children equally or what role a surviving spouse should have in leadership. It is no wonder many entrepreneurs put off thinking about succession.

Twenty percent of family business owners have done no estate planning whatsoever and thus have no real understanding of how their children and surviving spouses will handle inheritance issues. Many businesses fail to pass on to the second generation because tax obligations necessitate a sale of the business.

Along with planning, business owners must communicate their plans to the younger generation. Planning in a vacuum can lead business owners to make major mistakes that cause family tension, alienate heirs, and derail the transition.


Succession is a psychological shift many elders are not prepared to make

Often the existing leader cedes control of the burdensome aspects of running a business — management duties. At the same time, the older generation is reluctant to let go of decision-making in meetings, voting rights and other privileges.

As long as one generation maintains true ownership and the other maintains management authority, there will be a power struggle. At best, it can make meetings unpleasant. At worst, it can sabotage business decision-making and harm client relationships.

While letting go can be difficult, this uneven dynamic creates frustration among new leaders who may feel they are not trusted with the elements of day-to-day business operations or that their new authority is undermined by well-intentioned meddling from relatives who may not be psychologically ready to move on.

Business succession planning undertaken well in advance can help those leaving the company prepare for the future, transition duties in a mindful way that respects the needs of the business, and exit with everyone feeling prepared for the change.

Some children may see the family business as a fallback plan — and are not prepared for leadership

In the past, parents may have pressured disinterested children to take on roles in the family company. Contemporary parents, perhaps modeling the way they wish they'd been treated, tend to tell children they are free to join the business — but only if they want to.

Children raised in prosperity from successful family businesses may not feel a sense of urgency about a career, inside the family business or otherwise. As a result, they tend to do what they want as young adults and see the family business as their fallback plan.

In their 30s or 40s, adult children then demand the positions that were always there if they wanted them, without possessing the experience necessary to succeed in the roles. When unprepared relatives assume high-level positions, it sets the business up for failure.

Family businesses are first and foremost businesses, and the best way they can provide for the family is by remaining profitable. Accordingly, firms should adopt stricter standards by insisting that children who wish to have a place at the table possess the necessary skills and qualifications to be competitive with applicants.

A business succession plan can reduce estate and gift tax liability, protect the family's wealth, and preserve both the legacy and the operation of the family business. If you wish your family business to succeed into the next generation, you must plan for it.

If you would like to arrange for a complimentary consultation to discuss transferring your family business to the next generation, please contact us today at (949) 482-3992 or bizexperts@watsontaxlaw.com.