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Global business and accounting firm PwC (PricerwaterhouseCoopers) conducts annual surveys of family-owned businesses which offer insights into the challenges they face. The most recent survey showed that nearly 75% of family-owned businesses say they have trust between family members. Trust is essential for a successful family business, but at the same time, only 19% of the businesses said they had formal procedures to deal with disputes among family members. Managing and understanding the dynamics between family members and their roles within a business is one of the most important factors in success. According to PwC, the two greatest threats to family businesses are conflicts and succession planning.

Fortunately, you can establish and execute a family business succession plan that can reduce and manage potential conflicts within your business. Going through succession planning with the help of professionals will greatly increase your chances of having a successful transition to the next generation of your family business leadership.

Understanding the Challenges of Family Business Succession

PwC family business surveys show that family members have argued about the future of their business at least half of the time. About 40% also report that they’ve argued about the work performance of other family members.

Generational differences also play a role, with widely varying values and priorities between older and younger family members. All businesses share challenges in successful planning which include leadership structures, pathways to advancement, and formal exit planning for senior company officers.

When families are involved, family dynamics also come into play. There may be emotional issues within the family that are completely outside of daily business operations. They can include sibling rivalry and different opinions about leadership choices and emotional attachments to the business.

A Cautionary Story From the Construction Industry

A financial advisor specializing in the construction industry related the story of “Sam,” the son of a successful contractor, “Joe.”

Owner and founder Joe created a succession plan for his business, with Sam intending to become the owner after his death. Sam already worked in the business, so he had plenty of knowledge of and interest in the firm.

However, faulty tax guidance and misapplied structures for retirement funds and living trusts meant that Sam had a severe tax burden when his father died of a heart attack. As a result, the contracting business had to generate higher earnings that year to cover the taxes owed upon Joe’s death. It turned out that Joe hadn’t consulted with Sam before making the tax and trust arrangements.

Clear communication and transparency are key elements in reducing the sense of threat some family members may feel when succession planning is underway. Most of all, working with professional advisors who are not family members can help to reduce conflict and to establish clear pathways for succession in family-owned businesses..

Family Succession Planning

Evaluating Business Assets and Structure

A business valuation is a critical process in succession planning, providing an estimate of the market value of your company. It involves a comprehensive assessment of your business’s assets as a starting point, going beyond the company’s book values. While the structure of your business may play a role in the valuation process, it is primarily the task of tax or legal advisors to assess and suggest any changes to the business structure. A clear understanding of your business’s current market value and structural considerations can pave the way for a successful succession plan.

Evaluating Business Assets and Structure

A business valuation is a critical process in succession planning, providing an estimate of the market value of your company. It involves a comprehensive assessment of your business’s assets as a starting point, going beyond the company’s book values. While the structure of your business may play a role in the valuation process, it is primarily the task of tax or legal advisors to assess and suggest any changes to the business structure. A clear understanding of your business’s current market value and structural considerations can pave the way for a successful succession plan.

Executing a Succession Plan (Step by Step)

After you evaluate your business assets, obtain a business valuation, and define your business structure, you can create your succession plan. The following steps can help guide you through the process of succession and exit planning:

  • Step 1: Establish business values and vision.
  • Step 2: Draft financial and performance goals and objectives.
  • Step 3: Review and revise (if needed) business and legal documents.
  • Step 4: Establish a timeline for succession.
  • Step 5: Select successors and leadership for the transition.
  • Step 6: Clarify commitments, roles, and responsibilities.
  • Step 7: Anticipate potential conflicts and be proactive in solving them.
  • Step 8: Follow the timeline you’ve established and conclude the succession process.

Guidelines for Succession Planning

What is the most frequently identified guideline for good business succession planning? Create a written plan and disseminate it among not only family members, but also business leadership and any other stakeholders.

You’ll also want to engage qualified professional advisors during the process. They can include Certified Exit Planning Advisors (CEPAs) who are not only financial advisory professionals, they are also trained in business exit and succession planning.

Many of the activities and skills that are common to successful business operation also come into play during succession planning. They include evaluating the strengths and weaknesses of family members, identifying and prioritizing critical leadership roles, and providing professional development and training where it is needed.

Open communication and transparency are essential in the succession planning process. Communicate effectively with family members, employees, and other stakeholders throughout the succession planning process.

Questions to Consider During the Building a Succession Plan

Succession planning is both practical and aspirational. Here are some questions to ask and answer during the transition process:

  • What is our long-term vision for the business?
  • What is the timeline for our succession and transition?
  • What gaps do we see between the skills and experience of successors and those that are needed?
  • What training and development do the successors need?
  • Who are the stakeholders for our business? (Employees, management, customers, vendors, and suppliers)
  • How will we communicate our transition to our stakeholders?

Succession Planning Preparation with DHJJ

At DHJJ, our team of seasoned financial and business advisory experts is here to guide you through every stage of the succession planning process. We specialize in business valuations, succession planning, and business exit planning. Reach out to us today to start your family business succession planning journey with confidence.

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