Part 2 of the "Process-Oriented Approach to Family Business Succession Planning" Blog Series
In my last post, I advocated a call to action…to overcome the inertia, rise to the occasion, and begin a process to overcome the odds stacked against the successful transfer of a closely-held business to its next generation of owners and operators by developing, documenting, and communicating a plan culminating with the orderly and successful transition of the business.
So now, where does this often elusive process begin? The answer is simple--the process must begin with the senior generation of owners and operators who currently control the business. Whether a single individual, or a group of owners, the senior generation must start by facing the issues that will be important in defining the ultimate goals related to ownership succession, management succession, financial security, tax efficiency and family harmony.
Let’s start with clarifying the current owner’s attitudes toward ownership succession. Whether the senior generation of owners built the business from the ground up, succeeded a prior generation of owners, or purchased the business from third parties, one of the greatest challenges will be who will assume the role of owner after their retirement? Unfortunately, there is no easily replicable formula that may be employed to assist the senior generation in answering that challenge because the critical factors in achieving success will vary greatly from business to business.
I would encourage any owner or group of owners to begin by generating a series of questions designed to elicit the answers they believe necessary in setting the parameters for the next generation of owners. Though not exhaustive, some of the questions might include the following:
- Who should be included in our next generation of owners?
- Should the next generation of owners be limited to family members?
- Should key employees be considered for share ownership?
- Is employment in the business a condition for family share ownership?
- If employment is necessary, at what level? Executive? Management? Rank-and-file?
- Must all family employees be treated equally?
- Is there a means to treat family members fairly without granting share ownership?
- Must ownership be relinquished if a family member ceases to be employed?
- Is ownership a birth-right? Is kinship the sole prerequisite for share ownership?
- If ownership is a birth-right, how does one distinguish between differing levels of contribution to the business?
- When considering income, earnings and the complexity of the business, are ownership and management necessarily co-dependent?
- Should a Shareholder’s Agreement be implemented to restrict the subsequent transfer of shares?
- How should contingencies such as death, disability, divorce, retirement, resignation or termination be addressed?
- What economic benefits should minority shareholders receive?
- What challenges could be posed by minority shareholders?
- Should an independent board of directors or advisors or family council be considered?
- Should I be using share ownership and the business to address family dynamics?
- Should professional counselors be employed to navigate these complex questions?
Answering these questions in a manner that balances the best interests of the business with deference to family harmony will provide an important first step in the journey to a successful transition.
The next set of issues for consideration will address the current owner’s attitude toward management succession…so stay tuned!
Read other posts in our "Process-Oriented Approach to Family Business Succession Planning" Blog Series:
Part 1: Effective Business Succession Planning: A Call to Action
Part 3: Balancing Family Relations with Family Business
Part 4: Identifying the Business Owner's Goals - Cash Flow and Financial Planning
Part 5: Identifying the Business Owner's Goals - Taxes
Part 6: Business Succession Planning: Keeping Your Buy-Sell Agreement Relevant
Part 7: Business Succession: Who Are the Stakeholders and How Can You Satisfy Them?
Part 8: Don't Let the Failure to Communicate be Your Business Succession Plan's Downfall