Did you know that only 30% of family owned businesses survive the transition from first generation to second generation and 12% survive to the third? There are many reasons for these failures, but family dynamics are a key reason. Which family member will take over? Are there different business philosophies among siblings? What are the income and estate tax issues? Is there a plan? These and many other questions need to be answered or at least addressed. In some instances the solution may be to sell the business.

Younger generations need to be prepared and developed into leaders. The best way is to teach them all aspects of the business from the bottom up. This includes sales, finance, human resources, purchasing, production, and distribution. The more potential successors understand the business the better chance that a succession plan will work. The younger generation needs to earn the trust of customers and employees.

If multiple siblings are involved in a business it is important for roles to be defined and a leader to be chosen. A leader is not a dictator. The leader must be a consensus builder and have the trust of other shareholders and employees. Many family businesses bring in a non-family member to run the business until a family member is ready to assume a leadership role.

Informal boards of advisers are all also extremely helpful with successful transitions and developing structure. The board may include attorneys, accountants, and retired executives who have experience in dealing with the same issues that you have. Advisers should be trusted to mediate family conflicts and advise on best practices. Family owned businesses should proactively address the following succession planning issues:

  1. Compensation among family members. Are all treated equally or not?
  2. How do you transfer equity from generation to generation? What are the estate tax implications? How do you value the company?
  3. What happens if a shareholder becomes disabled or dies? Is there a buy sell agreement? Is there sufficient life insurance and disability insurance?
  4. How do you address conflict among family members/shareholders?

The guidance of professional advisers in developing and implementing a succession plan will greatly increase the chances of a successfully transitioning your business. The best time to get started is now.

For more information on succession plans, please contact Howard Spiller, Managing Partner, Sharkansky.