Business Succession Tips for Family Owned Businesses
Family owned businesses present tremendous opportunity for financial advisors. It’s estimated that between 80-90% of businesses in the U.S. are owned or controlled by families.
About a third of them are Fortune 500 companies. But this doesn’t mean they are all big corporations. In fact many are small- to mid-sized businesses. Family owned businesses also account for approximately 78% of jobs created in the United States.
Advising family businesses requires a unique skill set that goes well beyond finances. Financial advisors must also navigate the never-ending complexities of family dynamics.
Succession Planning
More than 30% of all family-owned businesses make it to the second generation, 12% into the third generation and 3% to the fourth and beyond, according to the Family Business Alliance, a membership organization for family businesses.
The main cause of family businesses failing is not having a succession plan in place.
Just over half (53%) of family businesses have a succession plan in place for some or all senior roles but only 30% of those plans are properly documented, PricewaterhouseCoopers concluded in its Family Business Survey in 2014.
Even more alarming is that only 16% of respondents overall and only 25% of respondents aged 65 or older have in place what can be described as a robust succession plan.
Less than half of respondents to the study said they plan to pass the business, both ownership and management, to the next generation. Just over 30% plan to pass on ownership but will bring in professional or non-family management. Twenty-percent, meanwhile, say they plan to sell or float the business and less than 10% don’t know what they plan to do.
Having a written, formal succession plan in place is essential to making sure a successful handover takes place. “A plan that is not written down is not a plan, it’s just an idea, and this is an issue family firms must address with the same commitment and energy as they are devoting to professionalizing other aspects of the business. Because without it, the entire enterprise is at stake,” Pricewaterhouse Coopers cautions in its study.
Family Conflicts
Managing family dynamics and the conflicts that arise can be one of the most challenging aspects of advising a family business. A combination of business and family almost always results in conflicts, especially when multiple generations and extended family come into play. Let’s face it, some family members just don’t get along. Sibling rivalry is a classic example. This emotional scenario mixed with business can lead to disaster when it comes to making sound business decisions.
Bridging the gap between generations who may see things differently when it comes to running the business is another example of how conflicts can arise.
“Family businesses generally fail for family reasons,” one interviewee lamented in the Pricewaterhouse Coopers survey.
Mass Mutual Financial Group found in a study it conducted, Family Preneurship, that when conflict arises 62% of respondents said they negotiate or vote, 23% argue and 4% ignore the conflict altogether.
Healthy communication is key and working with families to put together a conflict resolution plan can help minimize the risk of potential conflicts. Plans and procedures can include setting up family governance, such as a family council, or bringing in an independent third party to mediate. Having a solid, written succession plan in place can also head off potential conflicts.
The good news is that the majority (83%) of family businesses have at least one procedure in place to deal with conflict, according to the Pricewaterhouse Coopers study.
Estate Planning
Estate planning is also a vital part of advising a family business and involves what can be complex tax implications when passing on a family business to heirs. It can take years to put together a comprehensive estate plan.
Advisors may need to bring into the fold or work with the family’s attorney specializing in estate taxes to help set up a plan that will minimize the tax bill when the business is transferred. This is particularly true for high-net-worth family businesses.
How estate taxes will be paid is a big consideration as the net worth and majority of assets of many business owners is often tied up in the businesses itself. Proper planning will help avoid a scenario of heirs having to sell off business assets, such as property, to pay estate taxes.
While a majority of respondents in Mass Mutual’s study said they had a plan to deal with estate taxes, 43% said they didn’t have or didn’t even know if they have a plan. Family businesses with $3 million or more in annual revenue are significantly more likely to have an estate tax plan, the study found.
The Bottom Line
While family businesses present great opportunity for financial advisors, advising them goes well beyond managing assets under management in large part due to the complexities of family dynamics and conflicts. Developing succession, conflict and estate plans is crucial in helping family businesses thrive and make it to the next generation.
Reference: Wendy Connett, Investopedia, (March 16, 2015)
Filed Under: Business Succession, Business Planning
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