Many family business owners understand the importance of planning
their exit strategy but struggle with how to divide up business interests among
family members fairly, determine which of
the qualified family members should be
named as the successor, and make decisions involving when to step down and
how much control should be retained.
Smart Business learned more from
Scott Rittenberg, CPA and a tax principal
at Tauber & Balser, P.C., about the importance of developing an effective family
business succession plan.
What is the objective of a succession plan?
The objective of a succession plan is to
help manage the tension and uncertainty
among the children as to their financial
future with the company and to outline
future control and ownership of the family business. Transferring ownership can
be a difficult matter complicated by high
emotions. An effective succession plan
can help manage these emotions by providing family members a sense of where
they fit into the company’s big picture.
According to the Family Business
Institute, ‘Only about 30 percent of family
businesses survive into the second generation, 12 percent are still viable into the
third generation, and only about 3 percent
of all family businesses operate into the
fourth generation or beyond. Research
indicates that family business failures can
essentially be traced to one factor: an
unfortunate lack of family business succession planning.’
What types of advisers may be needed to
help with the process and ensure a smooth
succession transition?
An independent family business adviser can develop a succession plan based
on what’s best for both the business’s and
family’s futures. Making the process as
impartial as possible will help secure buy
in from the successors and other family
business members. A family business
adviser can help during the selection
process of the successor and other key
management positions.
Legal and accounting advisers should
also be consulted with to determine the
impact of the leadership transition on the
business in terms of its legal ownership
and management structure, tax liability,
estate planning, retirement income and
valuing the business. A psychologist
skilled in family business dynamics may
also be needed to facilitate difficult and
emotional discussions.
What are the key elements of a succession
plan?
- Identify a successor. Ownership
should be transferred to those who are
capable and want to run the family business. Family members should be asked if
they want to work in the business, if they
would like to be a shareholder or prefer to
sell. Nonfamily, high-potential candidates
should also be considered. - Leadership preparation. Grooming
the successor should take place years
before the transition. Adequate time is
needed to help the successor acquire the
education, training, experience and skills needed to take the helm. This includes
having the next-in-line work in various
areas of the company, such as sales and
marketing, human resources, operations,
purchasing, and finance. - Communication. As transition plans
take shape, communicate them to key
stakeholders, including family and non-family shareholders, employees, customers and suppliers. Communicate
about future roles, the new leader and
what to expect during and after the transition. If key stakeholders are not properly communicated with, they’ll likely grow
concerned and speculate about an uncertain future, possibly breaking their commitment to the company and jeopardizing
the family business’s future. - Implementation. Educate family and
nonfamily employees about their parts in
implementing the plan. Involving them in
every stage will help secure their buy-in
and rally their support. - Blending. Merging the strengths of
the present and future generations builds
a foundation for continuity and ongoing
success. Document each generation’s
contribution and educate successors so
they may continue to develop accomplishments. - Embrace change. The skills and roles
of future successors as well as activities
and products of the business will have to
evolve. Family business members need to
embrace that evolution and actively seek
to change for the better.
With a well-thought-out succession plan,
your family business will more likely be
able to survive and thrive and live on for
generations to come.
SCOTT A. RITTENBERG, a tax principal at Tauber & Balser, P.C., has more than 15 years of publlic accounting experience dealing with
the tax issues of small to medium-sized businesses, with an expertise in family business, tax insolvency issues and closely held businesses. Reach him at (404) 814-4974 or [email protected].
