Succession is a make-or-break circumstance for a family business. A leadership transition can be fraught with emotion and complicated by difficult family relationships. In order to defy statistics and last beyond only one or two generations of family ownership, family businesses must be prepared for this important transition and invest in the structures, systems, and resources to maintain profitability and ensure longevity.
A successful family business leadership succession requires a 360-degree view. By considering the financial and relational aspects together, family businesses can more successfully navigate the tense emotions and difficult conflicts that often come with leadership transitions.
The Financial Side of Succession Planning
Valuation is key for any business sale or transition, as it establishes a clear basis for financial agreements. A proper business valuation will also correct any misperceptions and help to prevent squabbling over perceived value.
In addition, sound financial health is also imperative for an effective succession. Sloppy books, inaccurate numbers, or an entanglement of family and business expenses will make it difficult to retire the current leaders and successfully transition the new leaders.
When an exit is properly planned, family businesses have the important opportunity to maximize value. This will aid in the owner’s retirement planning and will help to ensure continued success and longevity for the business.
While essential, these financial steps are not sufficient for a successful transition. Advisors could create the most legally sound and financially advantageous plan that completely flops due to uncommunicated expectations, a mismatch of corporate values, or unresolved conflict.
The Relationship Side of Succession Planning
Choosing the next leader depends on many facets and should consider a candidate’s business acumen and work experience, as well as values and principles. The next generation must be guided and nurtured from a young age. Adolescent family members can start with an internship, and conversations about leadership interest should start early to gauge skills and interest.
Requiring a certain level of education and prior experience (internal and/or external) can make the succession process more objective and help to remove (or at least reduce) accusations of favoritism. Clear communication regarding these criteria not only to the next generation of leaders, but also to all family members and stakeholders, will help to increase transparency and acceptance.
Finally, the succession planning process should be grounded in the values upheld by the family and the business. One of the most celebrated strengths of family-owned entities is a commitment to strongly-held values. These values and principles are what help family businesses outlast other companies, particularly in difficult economic times. The next generation of leadership must hold fast to the values and traditions that are important to the family and the company. Maintaining the business’s unique culture is just as important for long-term success.
Like many aspects of successful business practice, succession planning requires a holistic approach. Collaboration between family members and with trusted advisors can help to ensure that the financial building blocks and relational ties are in place to lay the foundation for the next generation of family business leaders.