Succession planning myths and tips

By Mary Van Skiver

For many retiring family business leaders, the difference between watching their company flourish and seeing it falter comes down to a well developed and carefully executed succession plan. Regardless of where you live, effective succession planning is essential. Challenges that are common to business families worldwide include making planning a priority, communicating with family members and key employees, strategically timing transitions and instituting family and business governance that will help smooth the succession process.

A global issue

Some countries do not have a long tradition of family business ownership. In China, for example, private enterprises have been legal only since 1978—the year Ashton Kutcher was born. In Australia, a 2010 survey of 5,000 companies (the MGI Australian Family and Private Business Survey) found that 84% of the respondents' businesses were less than 50 years old, and just under half were less than 25 years old. As the founders of these companies approach retirement, their business transition experience will serve as an example—good or bad—for future generations.

Family business owners in France face a different type of succession planning challenge: Transfer taxes can reach up to 45% of the value of the assets, according to a 2014 report from KPMG.

In the United Kingdom, a 2014 survey of 5,000 family business owners by Family Business Place and law firm Charles Russell Speechlys found that 65% of respondents were considering selling their companies upon retirement rather than handing ownership to family members who lacked the aptitude to lead.

Addressing these and other issues related to transition requires forward-thinking succession planning. Here are two myths that must be debunked, plus four tips for ensuring your family business continues to thrive during leadership transitions.

The myths

Myth #1: Family companies don't need to focus on succession planning. This could not be further from the truth. It should not be taken for granted that a certain family member will inherit ownership of the company solely because of his or her relationship to the CEO or family expectations. Your successor should earn this role based on merit. Each potential successor must be carefully vetted and developed so he or she is able to lead effectively.

Myth #2: I can wait until I'm about to retire to choose my successor. The next leader of your company should be selected well in advance of the transition date, and the information should be communicated to the family. This is key to minimizing family conflicts, as diverging expectations can arise when a succession plan is not made clear ahead of time.

Additionally, the future leader should undergo a rigorous orientation and training program designed to provide a thorough understanding of the company. This information cannot be learned overnight, even if the successor has been part of the family business for a long time.

The tips

Tip #1: Implement individual development plans. All your employees should be well versed in their responsibilities and provided with a road map for their development, often referred to as an individual development plan. The plan should outline specific job functions, goals to work toward and development opportunities offered by the company. Individual development plans should be unique to each employee and based on that person's talents and interests. The plans should also note areas that require improvement, while providing tools for achieving the goals.

When both family and non-family employees are aware of expectations for the present and future, they are better equipped to perform their job functions efficiently and successfully. Communication and consistency are crucial to helping employees reach their full professional potential, as well as mitigating any misunderstandings between employees regarding the future roles they have been selected to fill.

Tip #2: Institute a solid management system. Your management team should consist of people who offer transparency and accountability and who have the right skills to help your company reach the next level. Consider adding independent members, who offer unbiased perspectives, to your board of directors. This may ensure staff are treated professionally and impartially—a significant factor in any business, but especially when the staff includes family members. Having independent directors can also be an asset during times of family conflict; their objectivity can aid in finding resolutions.

It is imperative to involve future leaders of the business in management strategy. Begin by inviting them to observe management meetings and gradually start including them in governance. This is an effective way for them to learn how to create policy, make sound decisions and take appropriate action in a variety of situations.

Tip #3: Create a fair work environment. All family business employees must be treated fairly, whether or not they are your family members. Salaries and benefits should be consistent, and a family employment policy should be implemented and communicated. This not only is an ethical business practice but also increases the likelihood of attaining seamless leadership transitions in the future. Non-family employees are much more likely to respect and work harmoniously with second-generation owners if fairness is at the heart of management strategy.

Tip #4: Discuss finances. Individual perspectives can lead to clashes of opinions on the financial future of the family business. Future leaders should be aware of all current and planned decisions for the company, so any and all concerns and ideas can be aired and discussed. Be transparent about your succession and financial plans so that no one is surprised by or left in the dark about important decisions.

Take action today

There are many valuable resources at your disposal, but no amount of money or business savvy will enable you to buy more time. That's why it is crucial to get an early start in preparing your family and your business for the future. Start developing your transition strategy to ensure your company's legacy lasts long after you pass the torch to a new generation of leaders.

Mary Van Skiver (mary.vanskiver@rehmann.com) is a senior manager at Rehmann, a fully integrated firm of CPAs and business consultants, wealth advisers and corporate investigators. Rehmann is a member firm of Nexia International, a global network of independent accounting and consulting firms.

Copyright 2016 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 bwenger@familybusinessmagazine.com.

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Issue: 
March/April 2016

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