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Succession Planning -- Blueprint for the Future

Although a builder would never begin construction without blueprints in hand, many family business owners operate with no strategic plan and little, if any, thought regarding who will oversee the business in the future. Given the hard work that it takes to make a family business successful, ensuring its future viability would seem paramount. So why is so little attention paid to succession planning?

Succession planning requires an acknowledgment of change, such as retirement, death or possible sale of the business. Most people do not embrace change, and evolution of a family business affects not only the work but also the home environment. Family businesses encompass the two of the things most important to people: their money and those they love. Often just the fear that family members might disagree with one another is enough to prevent important planning discussions. In addition, families in business often are more preoccupied with running the business than with what will happen in a seemingly distant future.

Planning for Succession

Most prominent U.S. financial planners feel that the lack of early planning has a negative effect on successful retirement and, by implication, succession planning, according to a survey conducted in 2000 by Loeb & Associates and two university professors. What drives the succession planning process? It is often the simple realization on the part of people who are growing older that there isn't enough time to do everything. Family businesses often do not pass to the next generation. In the United States, just 30 percent reach the second generation, and only 12 percent reach the third. Frequently this occurs by design because family members reach a consensus to use their assets in a different way. For other families in business, selling may be a traumatic decision imposed on the family because of poor succession planning.

Other factors may contribute to family businesses not passing to the next generation. Many business owners spend so much time building and running a business that they cannot envision doing anything else with their time. In another survey of more than 1,600 active CEOs of family-owned businesses conducted by Loeb & Associates and two university professors, five percent of respondents said they “never” plan to retire. Sometimes as a result of this attitude, members of the next generation never receive the opportunity to develop their decision-making skills and are unprepared to take over the reins of power when it comes at a later date. Too frequently, the owner keeps information secret, and the next generation may not know much beyond the parameters of their jobs. If a wholesaler, for example, fails to train the succeeding generation for either leadership or ownership, the business can lose much ? if not all ? of its value when passing the reigns of power. Many businesses fail under this unhappy scenario.

Other recent research echoes the findings above. In the summer of 2007, the American Family Business Survey canvassed family-owned businesses to gauge strengths, challenges and changes since their previous study, which took place in 2002. The study reported that within 10 years, 40.3 percent of business owners expect to retire, creating a significant transition. Of these, fewer than half (45.5 percent) of those expecting to retire in five years and fewer than a third (29 percent) of those expecting to retire between six and 11 years have selected a successor, meaning there is much work to do and potential sources of instability for our economy. Of those who have selected a successor, the successor's median age is about 18 years younger than the current chief executive. Co-CEOs, as in previous years, have a similar rate (42.2 percent) of consideration.

• Many have less certainty about retirement, which is also a tremendous risk. Almost a third (30.5 percent) have no plans to retire, ever; and nearly another third (29.2 percent) report that retirement is more than 11 years away. Since the median age of the current leaders is 51, this means that many people plan to die in office, which is not beneficial to the family, the firm, its employees and its clients.

• Further exacerbating the substantial succession risk is the fact that nearly a third (31.4 percent) has no estate plan beyond a will. This is worse than the 2002 survey, in which only 19 percent had no estate plan beyond a will. Likewise, in 2002, 68 percent had a good understanding of estate taxes that could be due, whereas in 2007 this number deteriorated to only 53.5 percent having a good understanding. This lack of financial preparedness jeopardizes the ability of the next generation to maintain the business, particularly because paying estate taxes can have a damaging effect on business prospects.

Adapting to Change

Growing businesses must be able to adapt to a changing environment, and families must too. As a business becomes larger, it requires additional structure. Often this includes adding managers who are not family, delegating responsibilities and using sophisticated financial systems that open up knowledge within the company. The family's relationship to the business may change, with most shareholders having the role of owner rather than working owner. A workable shareholder's agreement allows owners to cash out and gives family members flexibility with their assets, while keeping those most interested in the business.

As the number of family members grows, conflict between nonworking and working owners can escalate. Developing rules for the employment of family members ensures that they meet certain standards, which helps businesses grow and be profitable. Separating the benefits of ownership and employment is critical. Developing fair employee and ownership policies requires family members to communicate, plan and focus on future needs.

Creating Successful Succession

Successful succession ensures that the assets of the wholesale business transfer in ways that strengthen the family.

You must do this while balancing the economic needs of the business with those of succeeding generations. Some families find they can make a better return on their assets by diversifying and selling all or part of the family business. A decision to sell that honors the family's values is not a failure.

For a successful transfer to occur, planning needs to take place over a period of years. In addition to passing on assets, the succession plan should have the goals of passing control of the business in a way that will ensure effective business leadership and support family harmony. Both of these elements are equally important to be present. Many families find the planning process to be an energizing experience that allows them the unique opportunity to refocus the company's and the family's paths. It is important for each generation to refresh the original vision and make it their own.

Thinking Strategically

What can the wholesaler do to develop a sound strategic plan for the future? The first step is to make an honest appraisal of the family, its history and values, and its business. What does the family business represent to family members? Is it merely a way to make a living? Do children resent the business for the amount of their parents' time it consumed? Or does the business represent the body of the family: its love, its values and its legacy? If the family business encompasses much of the family's emotions, loss of ownership ? even for family members not employed in the business ? may create feelings of disenfranchisement from their own legacy. In addition, if the business is sizable, adult children may wish their offspring or the next generation to have an opportunity to participate in the business. These differences create entirely different road maps.

If the next generation is involved in developing the succession plan, they may be able to work out how to distribute leadership. A leadership team rather than one controlling owner is becoming a more acceptable business practice. Others trim the ownership branches so that they can continue rotating back to one controlling owner. Sometimes a wholesaler will keep ownership within the family, and for others, adding nonfamily member-owners provides needed talents/skills as well as objectivity and liquidity.

Having discussions with people rather than making decisions for them helps create plans that everyone can support. Of course, present owners make the final decisions, which they should communicate directly from parent to child. This needed information allows beneficiaries to realistically plan their lives knowing what they may expect as their inheritance. Finding these things out at the reading of the will with no opportunity to question or explain can create generations of misunderstanding and hurt.

There are structures that a wholesaler can put in place to help a family stay connected when the business no longer employs all of them. One option, if the wholesaler sells the firm, is to manage the resulting assets as a family. Some families continue to keep their expanding members together through the use of family advisory boards and retreats where discussions occur about family traditions, history and creating new memories. Some larger families create philanthropic trusts; family members participate in or have input to decide the charitable giving of the family. This can help a family continue to be involved in a project even if members no longer all own a business together.

Family Business Advisers

Help is available to wholesalers to assist them in making good decisions, which they can tailor for their own family values and members. Traditionally, family businesses have employed advisers, including certified public accountants, attorneys and estate planners. Despite their expertise and experience, it is almost impossible to fashion a legal and financial document that will eradicate any possibility of family conflict. Frequently these advisers are uncomfortable with some of the emotional complexities that are part of all families in business, and they do not ask the questions that would help business families discuss and resolve their issues.

When the family is in tune with its own needs and wishes, better business decisions result. Family business advisers who have special training in the relationship issues faced by families in businesses help family members clarify values and make decisions that reflect their uniqueness. This focused decision-making can be difficult to accomplish, particularly in larger families and larger businesses, without the help of this type of adviser. Although specializing in the relationship aspect of the family business, family business advisers also serve a critical role in coordinating and interacting with the other advisers who help fashion the legal and financial plans. For maximum results, the succession plan, the estate plan and the family's values and vision for the future all need to work together.

Family business advisers help family members recognize what is important to them. This enables families in business to make critical business decisions. For example, if a family-owned or owner-managed distribution company has many talented young people who wish to join the business, the strategic plan likely will focus on growth and development. If most of the next generation has chosen other professions, but the dealership has size and success ? and the emotional attachment is great enough ? family members may decide to forego family leadership and hire professional management to operate the business. It is important to realize that one size does not fit all. Advice that is very helpful for one family may not apply at all to another business family. Going through the process of asking difficult questions and making wise decisions does not eliminate all differences, but it certainly increases the capacity of a family to fulfill its vision. Change will occur, and family businesses that have planned and prepared are better able to control their destiny.

Margery Engel Loeb, president of Loeb & Associates, consults on a variety of issues related to transition, change, communications and planning. She is a frequent speaker and presenter for seminars and conferences. She also conducts research on issues related to retirement and CEOs in family businesses. With 30 years' experience working with families and businesses, Loeb holds an advanced degree that includes specialized training in human behavior and family dynamics. She was a third generation nonworking owner of her family business. Contact her at [email protected] or visit

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