Family-owned businesses — from small two-person-owned brands to Fortune 500 companies — generate 64% of America’s Gross Domestic Product (GDP) and employ 60% of the U.S. workforce. For many family business owners, the goal is to keep the company in the family, passing it down for generations to come. However, those plans don't always happen automatically and without potential conflict. That's why succession planning is especially critical for the long-term success of family-owned businesses. Here's what to know.
What Is Family Business Succession Planning?
A succession plan is a business strategy used to identify and outline future leadership roles in the company passed down to upcoming generations. This plan helps support the company's long-term strategy and goals while ensuring it continues to run smoothly through leadership changes.
Family business longevity isn't always guaranteed. While the majority of family-owned businesses say a clear governance structure is in place, only 34% have a documented and communicated succession plan. And, according to Cornell University's SC Johnson College of Business, only 13% of family-owned businesses make it to the third generation.
Good Governance Forms Strong Foundation for Succession Planning
Research estimates that approximately 30% of family businesses may see their leaders either retire or, unfortunately, pass on within the next decade. Without established and effective corporate governance, an unexpected change in leadership — let alone a planned one with no plan — can wreak havoc on an organization.
Accordingly, a board of directors, governing body or external board of advisors are key. They can be installed to help oversee the planning for the succession of executive officers. An effective succession plan can help a business proactively prevent and avoid significant disruptions or uncertainty about its future if its leaders retire or the unexpected happens.
How Leaders Can Approach Succession Planning
Successful family business succession planning often begins with strong leadership. As with any organization, a family business isn’t immune to disagreements around strategic direction and roles. It may also take patience to balance long-term strategy with ongoing flexibility to feedback and input. Here’s how to begin developing a succession plan.
Start Planning Early
Research indicates 25% of family business transitions do not succeed because the chosen heir was ill-prepared to take over. So starting the planning process early is critical. As you enter the planning stage, it may help to gather a consensus on what readiness looks like for your organization's next generation of leadership. Depending on your business, that may include spending years working for the company and building a robust knowledge of all of its areas through first-hand experience, reaching certain levels of education, or having hands-on skills and training from the ground up. It may also involve being deliberate about building relationships with employees across the business so they get to know and can rely on family members who may become the company’s future leaders.
Foster an Environment of Education
Keeping an open mind to feedback, thoughts and opinions from family members is sometimes challenging. However, it's also essential to bolster engagement and participation — especially from the rising generation — rather than pushing back that there's only "one way" to get the job done.
Part of your succession planning may include strategies to create an environment open to learning and feedback. Some businesses set aside funds for education, training or entrepreneurial projects as testing grounds for ideas that are surfaced. Family members demonstrating a willingness to learn can help build trust, competence and credibility among different generations.
Keep Open Lines of Communication
There's power in multigenerational thinking — especially in a family setting. Communicating about shared values is one path to finding a commonality that may help younger leaders face fewer challenges in feeling heard. Opening communication can help you lean into those values, which can serve as a guiding light through a transition process.
Consider having a conversation about values and expectations when the whole family is together, such as during a planned meeting. Open the discussion by explaining you want to make sure the business is in good hands and a comprehensive plan is in place for future generations. This can help get everyone on the same page and potentially prevent disputes from arising later on.
Another area where open communication can bolster the business is listening to those in the upcoming generation with new ideas about technology and security operations. Only 39% of family-owned businesses feel they have strong digital capabilities. Engaging with tech-savvy and cyber-focused family members can open up new strategic opportunities for the company.
Build a Team of Trusted Advisors
Developing a sound family succession plan takes time. There are many financial, tax and legal considerations to account for as you go through the process, including business valuation, formal agreement adoption and tax strategies. Establishing your organization's succession plan should be iterative and reviewed regularly each year to confirm it remains on track.
Working with your banker and other legal and tax professionals can help you lay out the necessary succession, governance and legal documents for everyone's approval. Having these discussions and documents in place may bring another layer of comfort and stability to your long-term business plans.
Communicate Plans with Customers
Once a succession plan has been solidified internally and when any change in company leadership nears, take the time to inform your customers. As so many business relationships are built upon personal relationships, it's important to approach this step with the same care and attention to detail as the planning stage. This communications strategy could help your family business clearly and confidently announce and implement its succession plan. At the appropriate time:
- Share news of any planned transitions and the leadership roles that will be changing
- Provide a timeline with details around the shifting tasks and responsibilities
- Emphasize a smooth transition and minimal impact to customers
- Devote time to answering client questions and addressing any concerns
- Reinforce the organization's confidence in its people and plan
- Offer updates while any transitions are occurring
- Confirm when new leaders have assumed their roles and thank previous leaders for their contributions
Successfully Pass the Baton to the Next Generation
Family business succession planning isn't just about planning the logistics for the business. It’s about taking a holistic approach that looks at the best ways to continue your legacy. Succession planning is one way, but selling the company outright or starting an employee stock ownership program (ESOP) may align more with your long-term goals.
You can plan for the future of your family-owned business in many ways. Connect with a banker who can help you navigate all options and find the one that's right for your legacy.
The Commercial Banking team at Eastern Bank can work with your business to determine the best succession path that aligns with your future goals, needs and values.