Succession planning is an important part of long-term planning for family businesses that hope to pass the company from generation to generation.
According to the Society for Human Resources Management, only 23 percent of U.S. businesses have a formal succession plan in place.
Data from the Family Business Institute, a family business consulting firm, shows only about 30 percent of family businesses survive into the second generation and 12 percent into the third generation.
But having a succession plan in place can help improve the odds of success for multi-generational businesses, said Dan Potter, practice leader of private wealth services at Grant Thornton LLP in Milwaukee.
“Each business should have a long-term strategic planning process as part of their standard operating procedures, and succession planning should be a component of that,” Potter said.
The first step for business owners is to start planning early – at least five years out – and identify a successor that can carry on the profitable growth of the business, Potter said.
It’s also important for companies to build human capital by cross training employees and considering backup successors in order to be prepared for unexpected leadership transitions, said Joseph Weitzer, dean of the Center for Business Performance Solutions at Waukesha County Technical College.
Each new employee brings a different skill set to the company and changes the dynamics of the business, so a succession plan should be flexible, Weitzer said.
“It’s really important at the ground level to look at succession planning as a development process,” he said. “You can’t just look at succession planning now because our president is two years away from retirement – you have to look at it for every position in your organization.”
Those differing skill sets are important when it comes to leading the growth of an existing organization, said Joe Sweeney, managing director of Corporate Financial Advisors LLC.
The first generation of a family business is an entrepreneur, but the second generation should be sales driven to grow the business, Sweeney said. The third generation should be a professional management team.
“You’ve got to understand where the company is in the product life cycle and what management expertise is needed to grow that business,” he said.
It can be tough for family business owners to recognize whether the necessary skill sets are present in their children, Weitzer said.
“It’s best to have an external party help facilitate the process to be able to get the emotion out of the process, because not every child or sibling or offspring is going to be your CEO or president,” he said.
Mark Rogers, a partner and estate planning attorney at Angermeier & Rogers LLP in Milwaukee, usually assembles a team of professionals, including a financial advisor, insurance professional, banker, accountant and business consultant, to come up with a succession plan.
Together, they assess the business and help the owner determine exit goals, such as transferring the business to a family member or selling it and passing the money along to family.
“The things that the business owner does should be able to be converted into systems and processes so that when I want to sell it or leave it to somebody else they can actually take over and lead the business,” Rogers said.
The next step is determining the value of the business, usually based on industry standards. The team then comes up with a succession plan and adjusts it based on the owner’s comments, he said.
Potter advises business owners to divide a succession plan into three perspectives: ownership, control and management. By thinking about each one separately, an owner can transfer value to family members without giving control away using voting stock and nonvoting stock classes.
Management should be determined by who has the skill set to run the business day to day – and that may come from outside the family, he said.
Once a succession plan is in place, an owner should put in place an estate plan and a buy and sell agreement to assure the plan is carried out in any circumstance, Rogers said.
Finally, a business owner should be willing to change the succession plan over time.
“Succession planning is not a one time thing,” Potter said. “It’s an ongoing thing to do it properly. As family dynamics, business conditions, economic conditions change, your plan has to be flexible enough to change along with it.”
