7 Lessons I've Learned About Family Business Succession Planning
Family Business Succession Planning
As a family business advisor, I've had the pleasure of working with families from all kinds of backgrounds, that work in all types of industries.
Most of these families, no matter what the size of their business or their family, face some types of challenges when addressing the matter of business succession.
The difficulty and intensity of these business succession challenges varies from family to family, and from business to business.
What is important to know is that challenges are common when it comes time to plan how your family business will navigate the changes that inevitably come in a family business.
The purpose of this article is to list 7 lessons that I have learned about what to do, and in effect, what not to do when it comes to planning for business succession.
it is my hope that by providing this list, that your family business can minimize or eliminate the problems that often accompany family business succession planning.
Lesson #1 - Estate Planning is not Succession Planning (But both are important and necessary)
Estate planning generally refers to a person's Will and how the matters of estate will be handled. This normally has much to do with minimizing taxes and how personal property will be distributed.
First let me say that creating an effective and well-structured Will is an art all unto itself. I have seen some well-written Wills. But I have also seen an equal number of poorly crafted Wills that are not written in harmony with the future plans of the family business.
Estate planning is a must. However, it needs to be completed in harmony with the future ownership and management of the family business. All tax strategies, succession plans and future management models need to work together and the documents created around all these matters so that they can work together to achieve the end goal in terms of tax and estate planning as well as business succession planning.
Lesson #2 - Be Willing to Pay for Good Advice (and follow that advice)
This may sound self-serving as I am someone who gets paid to provide sound information, but put that to the side for a moment.
My first point, is that good information and advice is worth the money.
I have learned that lesson a few times over in my own business dealings. And I have watched many other business owners learn the same valuable lesson.
It's in many of our natures to try and save a few dollars. And there is nothing wrong with that. The problem arises when we try and save money on the wrong things.
And the wrong things to try and save money on are in areas where we do not have experience or expertise.
It's generally a bad idea to rebuild your cars engine if you are not a mechanic. It's pretty safe to say that the repair is going to go wrong, and you'll likely have to hire someone else to do it anyway. All the while you've wasted time, money and energy trying to do it yourself.
The same is true for succession planning (or estate planning).
There is wisdom in paying for good advice, whether it be legal, financial or other. It's almost a guarantee that you will pay less, if you pay upfront rather than trying to pay someone to fix mis-steps.
My second point is follow the advice that you receive.
If you are paying a professional for advice and information, it generally makes sense to follow the advice that you get.
If you aren't inclined to follow advice, you need to ask yourself if you have the right advisor. If you don't think that you do, then go get an advisor that you trust. And by that, I don't mean someone that will tell you what you want to hear, or do what you want done even if there is a better course of action.
Lesson #3 - Pay Now or Pay More Later
The cost of something is always a factor when deciding if money will be spent.
It doesn't matter if it is a product or a service. Money matters.
As such, the financial investment required to complete a comprehensive succession plan is often a barrier to a plan being created.
However, when there is no succession plan, litigation or an auction may be the ultimate manner by which a succession plan is executed. In these unfortunate cases, the cost to go through litigation or the forced liquidation of assets is considerably more than paying upfront for a workable succession plan.
And I haven't even mentioned the emotional and mental toll that these events have on us.
Whenever possible, Pay Now.
Lesson #4 - Provide and Exit
We all go into business with family members with the best of intentions. And we assume that the partnership will be a long-term arrangement.
The reality is that life can bring all sorts of expected, and unexpected changes. And these changes don't always mean a breakdown in the business partnership. It may simply be that someone has lost interest in the family business, or wishes to re-locate for personal reasons.
No matter the reason, a well-crafted succession plan allows for such life changes.
And this type of exit strategy needs to be determined well ahead of time, and written in such a way that is fair to both the buyer and the seller. How will shares be valued? How will they be redeemed? Can they be sold to another party? These type of questions need to be addressed in any succession plan.
Retaining a disgruntled or disengaged shareholder isn't good for any business as it becomes difficult to maintain a positive culture and stay focused on business operations. In a family business, it can also lead to the erosion of family relationships.
Lesson #5 - Don't Assume
This lesson can be applied in so many different ways.
Don't assume your son or daughter wants to take over the family business.
Don't assume that your mom and dad are going to retire on a certain day and hand the family business over to you.
Don't assume that the family business is worth X.
Don't assume that two siblings can run the business together.
Need I go on?
When crafting a succession plan, you need to use real information. Real data.
Building a succession plan on the basis of assumptions will almost always lead to a failed plan, whether that failure occurs now or later.
The right questions need to be asked. And the right information has to be gathered if a succession plan is ultimately going to become a workable plan.
This is an area that a third party advisor can really add value.
Lesson #6 - Don't Wait
I have a saying, "problems rarely fix themselves."
And a similar saying could be said for succession planning, "succession plans don't write themselves."
The best day to start planning for succession is today. Few things will become easier tomorrow. More than likely, it will only be more difficult (and potentially more costly).
There has been rare cases where it makes sense to wait to plan. And those cases usually center around the young age of potential successors.
In the vast majority of cases, succession planning becomes harder the longer you wait.
Lesson #7 - Build Trust
Trust is fragile.
And it's not a naturally occurring renewable resource.
Creating trust, building trust and maintaining trust require considerable and continual effort.
If trust does not exist between family members, creating a succession plan is going to be difficult.
Where there is no trust, family members feel threatened and will assume that their interests are not being considered or protected. If this is the case, succession planning will likely fail.
It's never too early to start building trust. And let's face it, trust should be a central part of every healthy relationship no matter if that relationship is based on personal ties or business ties. Or both.
Establishing trust involves showing genuine concern for the interests of others. Trust also involves consistent actions that offer predictability and fairness to those around you.
When trust has eroded, family members and business partners begin to act negatively and self-centered, seeking only to protect their interests at the expense of others.
If you haven't conducted your family business dealings in a way that builds trust among family stakeholders, your first priority will need to focus on repairing trust between family members.
Family business succession planning isn't always an easy process. But like so many other things in life, it will happen, whether we plan well for it or not.
I hope that you can put these 7 lessons to work for you so that you can plan well in order to provide the best future for you, your family and your family business.
About the Author
Chris Hall is a family business advisor that coaches family-owned businesses through the challenges of family business. For more information on how Chris can help you, please visit: www.abbusinessbuilders.ca