Succession planning is the key to family enterprise resilience

By Robert "Bobby" Stover Jr.

When a family business fails, most people suspect that estate taxes or incompetent advisers led to its demise, but that’s rarely the case. Even before the estate tax exemption increased at the end of 2017, it was rare to find a family who couldn’t keep their business afloat because they needed to pay estate taxes. There were even fewer instances in which poor professional advice led to failed family enterprises.

Leading a family-owned business has never been more challenging. When a breakdown occurs, it’s usually due to the failure to build a solid succession plan that incorporates governance, communication and a clear vision for legacy preservation.

COVID-19 magnified the importance of succession planning. Now more than ever, it’s crucial for family enterprise leaders to ask:

• What if something happens to the CEO?
• Is the next generation ready to step in?• Do we agree on vision and legacy?
• How will we fund the business and care for shareholders?

Without answers to these questions and more, any form of disruption could put the family enterprise at risk of becoming another statistic. Companies with a well-crafted plan, on the other hand, tend to be resilient in times like these. They are able to weather day-to-day challenges and hardships without sacrificing their future.

Overcoming the odds
Well before the pandemic, family businesses found it difficult to endure. EY Family Enterprise statistics show that more than 65% of owners say they want to transition their companies to the next generation, but fewer than 25% succeed in doing so. The obstacles are many, according to a study by The Williams Group. They include:

• Breakdowns in trust and communication within the family.
• Inadequately prepared heirs.
• Lack of a family purpose that defines how to use wealth.

Transferring leadership from one generation to the next is complex, and many companies are slow to act. Leading family businesses, however, are just the opposite. In a 2015 EY report entitled Preparing or procrastinating? How the world’s largest family businesses undertake successful successions, 88% of respondents from some of the world’s largest family enterprises said they had clearly identified who was responsible for the succession process.

Those businesses have a clear vision and process for leadership transitions, which makes them more likely to overcome adversity and foster long-term stewardship.

Getting started and getting it done right
Research by EY Family Enterprise Services on upper-middle-market family-owned businesses — defined as companies with $100 million to $3 billion in revenues — shows that a transition wave is on the horizon. More than 75% will change hands over the next 10 years. The pandemic reinforced the need to prepare sooner rather than later. Planning must go beyond creating short-term contingencies should something happen to the current CEO. Preparation begins with:

• Clearly defining who is responsible for the succession process.
• Developing a system that’s ongoing and consistent.
• Establishing a planning process to react to market disruption.
• Building a team to support execution.

Succession planning offers an opportunity to address the now, explore what comes next and imagine the beyond. It encompasses family and business considerations, and it is built around leadership, ownership, legacy and values, and wealth transition. To start the process, it’s helpful to consider questions that are aligned with these four dimensions:

Leadership: Have you identified who should lead the business going forward? Are you willing to transfer control?
Ownership: Who will own the business after the leader retires? Should ownership be limited to those who are involved with the company?
Legacy and values: What are the family’s values? Is the family confident the next generation will uphold those values?
Wealth transition: Are there plans for how to share wealth among family members? How will the owner(s) remain financially secure after transferring the business?

Family considerations vs. business considerations
The business supports the family, and putting measures in place to safeguard continuity amid economic uncertainty is paramount. But family considerations, such as financial security, governance and next-generation and family changes, must be prioritized.

Family considerations. Financial security includes analyzing accounts for long-term annuity, life insurance and legacy-related goals, along with objectives that will impact active and inactive heirs. It involves calculations to determine whether the senior generation will have enough to live on once the business changes hands.

Governance involves determining not just who will run the business, but also how to uphold the legacy that the founders had in mind when they started the business. That mission is an essential North Star and provides focus in times of uncertainty.

Legacy also influences how the next generation will be brought into the business for an orderly transition. Now is the time to make sure documents are in place that spell out the desired owner succession, governance and control preferences and share them with key family members or business stakeholders. These steps will prevent surprises and minimize disputes.

Business considerations. For consistency, establish controls and clearly define and communicate roles, duties and responsibilities. A family office can delineate between business operations and family affairs. To protect the business itself, take a broad view. An unexpected occurrence like a pandemic or natural disaster is always a risk, but security and competitive risks can also have an impact, as can evolving regulations.

Liquidity is another potential risk, because it’s often a source of tension when shareholder needs conflict with the need for capital to fund the business. The pandemic and ensuing economic turmoil touched off a race to secure liquidity to keep businesses going and workers employed. As the dust settles, continue to identify liquidity mechanisms within the context of your objectives and priorities.

Finally, family businesses should look beyond their present state to find ways to enhance performance. There will always be bouts of economic uncertainty. Business owners should benchmark their companies against others in their industry of comparable size or complexity to identify opportunities for improvements or cost reductions.

Expecting the unexpected
A strong succession plan is one that sets the business and the family on a productive course for the long term. It offers a roadmap for handling and moving past roadblocks to emerge resilient.

We have yet to see the full impact that COVID-19 will have on family businesses, but it should influence how they prepare for the future. That includes anticipating potential disruptive events and plotting them on their roadmap. The economic recovery pre­sents a chance to test and retest to make sure leadership and governance systems can withstand the unexpected. 

Robert “Bobby” Stover Jr. is Americas family office leader at EY US.

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact    


Article categories: 
July/August 2020

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