Best Practices

Succession Planning: Don’t Let a Triggering Event Take Down Your Family Business

by Caroline K. Reff

Forty years ago, your father and mother started a family business. They worked hard, and the business grew. Maybe, as a child, you helped behind the counter or as a teen started to learn some of the skills required on the production end of the business. Your three siblings did the same. At some point, however, you and your siblings each had to decide whether to make the family business a career. Maybe your parents influenced you, pressuring you to stay with the business or conversely deciding that you needed to go to college and/or work in the outside world first to gain some experience. As the years went on, some of the siblings took on roles with the business and others did not. Now, mom and dad are ready to retire but will still depend on the income from the business and want it to continue to be family-owned and operated. So, what happens now?

The answer is not an easy one, and the details for each family situation certainly differ, but the need for preparation is the same, according to Daniel G. Van Der Vliet, executive director, Smith Family Business Initiative at Cornell University.

“Succession planning should be viewed as a process, not an outcome, and, as such, an opportunity to craft a desired pathway forward for all interested parties,” said Van Der Vliet, who noted that families should not wait until there is a disruption — death, divorce, retirement, the possibility of a sale or acquisition, etc. — before discussing the future and putting a plan in place.

A particular challenge to succession planning is the separation of family, business, and ownership — what we commonly refer to as the three-circle model of family business,” he explained. “Often, in smaller businesses, people wear multiple hats simultaneously, and, as such, fail to see the differences between family and business decisions and outcomes.”

Many don’t see the need for a formalized plan, but it is particularly important for a family-run business to have one, as there are so many factors, and emotions can run high in a crisis or transition. What if parents start a business and gift each of the children a share of the company, yet only a few of the children actually work for the business? What if a parent dies or steps away from the business? What about spouses? Does he or she retain a piece of the company if the couple divorces?

In many cases, small family businesses tend to have a harder time discussing these unknowns, much less formalizing some kind of written agreement. “Families are great at unwritten rules, informality and going with the flow,” said Van Der Vliet. “In a family business, very little gets delegated, and plans are not always spelled out but instead tend to be assumed.”

“The most important factor is going through the process,” said Van Der Vliet. He explained that 50% of business failures are precipitated by an owner’s death. That is why meaningful discussions and more formalized succession planning are vital to the continuation of a family business.

Van Der Vliet encourages family businesses to treat family members like any company would treat its employees. In any other type of working environment, an employee would have some sort of contract, an expectation of employment, education requirements, a negotiated salary, etc. However, in the case of family businesses “a lot of that goes out the door,” he said. “Often, family business owners think, ‘Why would I need that? I know my son or daughter. I don’t need to have these discussions or have anything in writing. They’ll know what to do.’”

Putting together a succession plan “removes the emotion from the decision,” said Van Der Vliet, who noted that this kind of agreement can range from formal legal documents to something written down in a notebook. He suggests some type of “family constitution” or protocol that outlines a set of rules to follow with regard to each person’s role or ownership in the business. Another good option is a buy/sell agreement, which outlines ownership or the transfer of ownership both in and outside of the family, should a disruption occur.

“Essentially, what we’re talking about here is called ‘governance,’ and that word has a tendency to scare families,” said Van Der Vliet. “Still, it’s just a formal word for a discussion and possible documentation to clearly outline the primary owners of the business, the company’s long- and short-term goals, the qualifications that members of the next generation need to join the business, and the expectations regarding input and profits for those working in the business versus those who are not part of the day-to-day operations. Putting this kind of work into the business before a triggering event can take some of the emotions and/or sense of entitlement off the table and help everyone understand the expectations and goals needed to keep the family business going strong.”

According to Van Der Vliet, having a board of directors, or at least a board of advisors, made up of primary shareholders and owners, as well as a few non-family members, can be advantageous to succession planning and good governance. Having people outside of the family participate on a board is usually beneficial, as their primary interest is in making solid business decisions and offering objective ideas and observations that are separate from the emotions that can run deep in even the closest of families.

From the corner store to a national brand, family businesses span the economic spectrum, but regardless of the size, “matters of family are fairly universal no matter how many zeros are added to the bottom line,” Van Der Vliet said. “Addressing the difficult, yet necessary, decisions up front will help make things easier later on.”   

Where to Start?

Are you thinking of putting together a succession plan for your family business but aren’t quite sure how to get started? The Smith Family Business Initiative at Cornell University in Ithaca, New York, has a variety of educational and networking tools, as well as resource referrals for family business owners, successors and students.

For more information, go to: 

www.business.cornell.edu/familybusiness

This site also offers a directory of university-based family business programs across the globe through the Family Business Alliance.

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