When it comes to family-controlled businesses, the question of succession is complicated. Emotional and personal factors drive it. There is a possibility of expanding the circle of stakeholders to include non-employee family members. Hence, it is essential to ensure that your family business succession is planned systematically.
This article discusses the importance of succession planning, steps to planning your business successfully, and the common mistakes you should avoid while making your family business succession plan.
What Is Family Business Succession Planning?
When it comes to a family-owned concern, succession planning involves financial security planning for the founder and their immediate family members. When selecting how to transfer a family business, you need to address critical issues such as:
- What is the business succession timeline?
- How will the business transfer affect the successor (owner) and other family members regarding authority, compensation, family values, work ethics, immediate wealth distribution, and long-term value development?
- What happens if a family member gets incapacitated?
- How does a family business succession plan affect conflicting personalities and individual goals?
- How to generate a steady income for each member to maintain a decent standard of living?
What Are The Key Drivers For Family Business Succession Planning?
Any business entity without a reasonable succession plan risks conflicts among stakeholders, endangering the company’s future. The key drivers for Family Business Succession Planning are as follows:
|Business Valuation – Tangible and intangible factors|
|Current Organization Structure and changes needed based on future identified successors.|
|Changes in Key Managerial Personnel|
|Standard Operating Procedures (SOPs)|
|Current Finances and proposed Financing options, if applicable|
|Insurance – for the founder, for business, for key people to ensure a smooth transition|
|Creation of Necessary Legal Documents, and Legal compliance/ Requirements|
|Dispute Resolution mechanism|
|Risk Management and Contingencies|
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What Are The Common Mistakes You Should Avoid in Family Business Succession Planning?
Founders of family-controlled business entities frequently make the following mistakes:
- One of the most challenging issues in family businesses is the owner’s unwillingness to give up control/power. They would often nominate someone to be the president or vice president but not allow them to make any significant decisions, thereby fracturing the succession idea.
- Short-term difficulties of day-to-day business overshadow the long-term goal of business succession. If the successors do not believe that they can work on implementing the vision laid down by the founders, the business succession is unlikely to succeed.
- After succession, if the founder fails to evolve based on changing market scenarios, it may lose its market position. The rigid attitude of the founder plays a crucial role in such situations.
- The transition stage in a family-controlled business from one generation to the younger generation is always tricky when sharing knowledge, expertise, and experience. However, the inability to acknowledge the decisions of the successors leads to failure in transition.
- If the successors do not believe that they can execute the vision, the business succession is unlikely to succeed.
Related Read: What Is A Will And Why Do I Need One Now?
What Are The Important Factors To Be Considered In Family Business Succession Planning?
The success of a family business is not determined by ownership or leadership alone. The following are some of the most important factors to consider while planning a succession:
The founder must have a clear plan for the business’s future. Many things are dependent on their vision, foresight, and maturity.
For tangible and intangible assets, one should construct appropriate structures to ensure smooth execution and operational and tax efficiency.
You should develop a good compensation scheme to retain talented personnel who can become future business leaders.
The founder should cultivate the right attitude and business interests in the successors before the hand over their business to the successors.
Appoint an independent board of directors/advisors to counsel and supervise the successors as and when needed.
For improved integrity and governance, overlapping structures deliberately combining a board of directors, a board of advisors, a family council, and a family office should exist alongside the daily management team.
The major stakeholders must be given a voice in the succession process. In that case, the legacy succession can become more transparent, with clarity of thinking and solutions to problems.
What Are The Steps For Successful Family Business Succession Planning?
Family succession planning necessitates careful consideration and effort. The following six steps will help you complete Family Business Succession:
Discuss with family members and use a SWOT analysis to determine your goals and objectives.
Establish a decision-making plan and identify your business successors.
To get the best solution, assemble a team of financial advisors and estate lawyers and examine your plan, vision statement, and current issues.
Create a legal and tax-effective business succession plan for your family’s business and personal assets.
Before implementing the Owner and Successor Estate Plans, review them and make any necessary adjustments.
Begin implementing the Business Succession Plan and accomplish the milestones within the allotted timeframe.
“Family business succession plan” should determine how to value the company, identify future owners and managers, and treat all family members fairly, regardless of their level of engagement in the company. As an entrepreneur, you can implement tactics to ensure that your legacy is not left to chance! The penalty of neglecting essential leadership or ownership changes in the following years could be enormous due to significant wealth transfers to cutting-edge business models and new ideologies.
Why Choose Incorp?
We understand that regulatory compliance and succession planning can be complicated. Our dedicated team of family office management experts, legal professionals, tax & financial advisors who have the required knowledge and experience are happy to assist you.