Succession Planning For Family Owned Businesses

What is succession planning in family businesses?

Family business succession planning involves the transferring of management, leadership, and ownership of a company from one generation to the next. It’s a multi-layered process that represents one of the biggest challenges a family-owned company can go through — given the potential for disagreements. 

All too often, discussions around succession planning for family-owned businesses are left until the very last minute, or they may not even take place at all before it’s too late. This can be for several reasons, ranging from wanting to avoid potentially-difficult conversations, to a belief that the time would be better spent focusing on the day-to-day running of the company. 

The reality is though that this process is not something to be ignored. Succession planning is vital to ensuring the business can continue to thrive after the owner has departed. 

Why is a family business succession plan important?

There are many reasons why family business succession planning is important. It provides a level of stability and certainty to the company, empowering executives to make important decisions for the future. Additionally, the process helps to avoid unnecessary distractions or even potential legal disputes, allowing the current owners to seamlessly transfer responsibilities and leadership to future generations.  

Family businesses are extremely important to all involved. Whether they’ve been inherited or built up from scratch, nobody will want to see their years (or decades) of hard work amount to nothing, or the wealth tied up in the company be squandered. It is therefore essential to get succession planning right at the first opportunity.

Challenges with family business succession planning

From poor communication and a lack of involvement, to the prospect of conflict and failing to seek professional advice, there are several challenges to overcome with succession planning for family owned businesses. Emotional attachment is another issue, as the process needs to focus solely on what’s best for the firm and not let feelings get in the way.

Here are the main elements to be aware of:

• Poor communication: Discussions around retirement and a transfer of control can be difficult for some business owners. A lack of open dialogue can cause misunderstandings and an absence of consensus regarding the future of the firm. 
• Lack of involvement: If not everybody is on board with the process, it will be difficult for things to run smoothly. Keeping all parties involved and in the loop will ensure people can work together to achieve a successful outcome. 
• Conflict and rivalries: Business owners should be tuned in to the relationship dynamics between family members and combat the potential of unnecessary disagreements arising. 
• Resistance to change: Existing owners may not be willing to embrace change, as it could make them feel they are losing control —of both their business and, in many ways, their lives. 
• Inadequate advice: Creating a family business succession plan can be a complex process. Obtaining the right advice and guidance is crucial to helping things run smoothly. 
• Poor management of tax affairs: Passing down a company to future generations can present many challenges and opportunities when it comes to tax planning and these need to be considered.

4 tips for succession planning in family businesses

Although every company is different, several best practices should be adhered to when it comes to family business succession planning. Here are just a few: 

1. It’s never too early

Succession planning for family-owned businesses is a process with many moving parts, so it’s important to take a proactive rather than a reactive approach. If you’re left scrambling to make last-minute decisions, they’re unlikely to be well-considered and could end up having a detrimental effect on the company. 

Remember, however, that succession planning, no matter how soon you start it, is an ongoing process rather than a single event. As a result, it’s important to regularly revisit your strategy to ensure that it remains fit for purpose — especially if any important life events take place to change the dynamics of the family, such as marriage and divorce. 

2. Ensure goals are aligned

Family members can often have conflicting thoughts and desires regarding how the business should grow. If everyone pulls in different directions, succession planning can become an incoherent mess, severely damaging the firm’s prospects.

Instead, it’s important to ensure all opinions are listened to and discussed, before jointly deciding on what’s best for the business. Once everybody is on the same page and working together, the entire process will run more smoothly.

3. Gauge who wants to be involved

It’s common for many family business owners to assume that future generations will want to carry on the tradition of running the firm, however, this might not be the case. Other company directors may present the prospect of taking over the firm as an obligation, rather than an opportunity.

Business owners should instead gain an understanding of who wants to be involved in running the firm going forward, and identify potential strengths and weaknesses so the right people can be deployed in the right places. If somebody has no interest in being part of the company or feels forced to do so, they’re unlikely to give the role their all — with both the company and the individual(s) in question likely to suffer as a result. 

4. View succession planning as part of wealth protection

Succession planning for family-owned businesses should never be viewed as a single entity. Instead, it should be incorporated as part of a comprehensive wealth protection strategy. Company and financial assets are often linked. For example, the transferral of shares can have a huge impact on how the firm is operated.
Business owners will also have certain goals they want to achieve with their wealth, so it’s important to have a clear understanding of the various structures that can be used to ensure these wishes are met. Examples of potential mechanisms to consider include trusts and tax planning, shareholders agreements, wills & estate management, and more.

If you’re aiming to secure the future of your family business, we provide a full-service offering to corporate clients and high-net-worth individuals. This involves not only creating succession plans but also navigating potential inheritance or shareholder disputes, drafting company policies and procedures, and addressing the specific challenges of your industry.

Our private client team is adept at providing a personalised, holistic service that ensures your interests and those of your business are protected. Should the need arise, we can also leverage our in-house specialists in areas such as employment law, corporate and commercial matters, and commercial litigation, ensuring every aspect is expertly handled.

For prompt, practical support, contact us today.