In the realm of family businesses, succession planning takes on a unique significance. These organizations often have a rich legacy of traditions, values and expertise passed down through generations. However, ensuring a seamless transition of leadership from one generation to the next can be filled with challenges as family dynamics, emotions and business complexities come into play. Succession planning for generational businesses requires careful forethought, open communication and a strategic approach to preserve the family legacy while positioning the business for future growth and sustainability.
It may seem obvious, but preserving the family legacy is only one consideration for a multi-generational business. You must also be profitable so members of each generation can feed themselves while they carry the weight of that legacy. The honor of continuing a business that your family began three, four or even more generations ago can be an incredible thing. You can walk in the footsteps of your ancestors, literally. However, that does not mean you should automatically assume your children will want to follow in yours. Instead, you should build a good business first — one that is desirable to anyone — and then hopefully bring your adult child into the business as soon as you can according to a specific game plan. Sometimes you should have them start at an entry-level position and spend years working their way up. Other times, you should bring them into a position of leadership immediately. Either of those methods comes with challenges but the important thing is that you have a plan that spans from their entry to your exit. Be prepared to adjust that plan constantly.
Good succession planning provides opportunities for younger family members to develop leadership skills, gain hands-on experience, and earn the trust and respect of stakeholders. It fosters a sense of ownership and responsibility, empowering successors to steer the business towards future prosperity. The right succession plans help manage expectations, clarify roles and responsibilities, and minimize conflicts among family members. By establishing transparent governance structures and communication channels, generational businesses can navigate sensitive issues and foster harmony within the family and the business.
Key Insights for Succession Planning in Generational Businesses
• Succession planning is a long-term endeavor that requires early engagement and ongoing communication among family members. Begin the conversation about succession well in advance, addressing concerns, aspirations and expectations openly and transparently.
• Identify and develop successors by assessing the skills, interests and aspirations of potential successors within the family. Provide them with opportunities for education, training and mentorship to groom them for leadership roles. Encourage them to gain diverse experiences both within and outside of the business. A preemptively placed successor can facilitate a seamless transition.
• Establish clear governance structures, decision-making processes, and mechanisms for resolving conflicts within the family and the business. Develop formal policies, agreements and succession plans that outline the criteria for leadership succession and the roles of family members in the business. “Handshake deals” among family members are a breeding ground for disappointment.
• Seek neutral external expertise such as a professional succession planner to provide objective guidance and support in succession planning. Their expertise will help navigate complex legal, tax and financial considerations while facilitating constructive family discussions.
Succession planning in generational businesses is a delicate balancing act that requires foresight, collaboration and a deep commitment to an extended process. As the current owner of the business, you must balance the need to honor your family legacy while being open to changes that the next generation might seek to enact. Ultimately, it is critical to focus on the business first, ensuring that it is healthy and prepared to operate for decades into the future. The strength of the business and the strength of your plan will make or break this transition, and if you do it right, you will make your own shoes much easier to fill.
Victor Werley, CFP, ChFC, CDFA, CVA, MAFF, CFE, CEPA, is a financial consultant in Little Rock and the founder of Pinnacle Advisors. Werley has been practicing for over 20 years and has managed hundreds of business transitions for himself and his clients. He has spoken to numerous groups in the business and legal fields about business valuation, how to structure good business deals and many other topics. He is passionate about small businesses and helping the economy of Arkansas.
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