As the Baby Boom generation continues its march to retirement, a significant number of entrepreneurs will soon begin the process of transitioning family businesses to the next generation. If you are about to embark on this journey, there are a number of potential pitfalls you will need to avoid.
According to the 2016 U.S. Family Business Survey conducted by Pricewaterhouse- Coopers, only about 43 percent of private businesses have done any exit planning whatsoever. Failure to execute a business transition may lead to multiple negative outcomes, including:
1. Breakdown of communication and trust within the family unit;
2. Inadequately prepared heirs and absence of a clear vision or mission to align family members; and
3. Failure by advisors to properly address taxation, governance and wealth preservation issues.
With success riding largely on a family’s ability to communicate and to clearly articulate a plan for the future, the following guidelines may help to ease the business transition process.
Start Planning Early
Get the process started years before the actual transition occurs. Some experts recommend building an exit/transition strategy into the initial business plan. As part of the planning process, business owners should create:
- Supporting structures, such as a family constitution and business bylaws to familiarize all parties with the rules of governance. Fewer surprises mean fewer conflicts and discord down the road.
- A clear vision for the business that involves all family members, whether or not they are active in running the business. Visioning is an effective method of allowing all stakeholders to share their personal goals for the business, which in turn helps create buy-in and minimize future conflicts.
Prepare the Next Generation
Identify the skills and leadership qualities the business may need in the future, and then prepare young family members to fulfill those roles. This will likely require sharing knowledge and providing educational opportunities.
Manage Conflicting Priorities
It is not uncommon for younger and older generations to have differing, and conflicting, priorities for the business.
- Senior leaders may have concerns about whether the younger generation “has what it takes” to successfully run the business; anxiety about the next chapter of their lives (retirement, staying involved in some capacity); or worries about all children, including those not involved in the business, receiving a fair share of the family wealth.
- Members of the younger generation may be anxious to “make their mark” on the business by taking it in a new direction; investing in new technologies or processes that may improve the business but require a significant capital outlay; and micromanaging by an owner remaining involved in day-to-day operations.
It is important that families express their concerns openly, and it may help to engage a professional facilitator. When all parties feel they are being heard and respected, the sense of commitment to the business—and the transition process—is strengthened. iBi
Cathy S. Butler, CFP, CRPC is a financial advisor with Morgan Stanley. For more information, visit www.morganstanleyfa.com/cathy.butler.