Estate Planning Blog Articles

Inheriting the Family Business: Succession Planning Secures Your Legacy

Preserving a family business’s legacy is challenging. Studies show that only about one-third of family businesses make it to the second generation. The numbers have been declining over the years, and one major reason is the lack of proper business succession planning.

Without a clear plan, businesses are more likely to fall apart during leadership transitions.  How can you prepare the next generation to successfully take over the family business?

Why Don’t Family Businesses Survive?

There are several reasons why family businesses struggle to stay within the family. One common issue is that the older generation often avoids discussing succession plans, hoping everything will fall into place naturally.

However, without a solid plan, when leadership needs to change, chaos can ensue.  Younger family members might also not feel ready or willing to take on the responsibility of running the business.

What Could Happen without a Business Succession Plan

Many business owners believe that their children or relatives will smoothly step into leadership roles. However, this isn’t always the case. Sometimes, younger family members aren’t allowed to learn critical skills, like decision-making and management, because the older generation maintains strict control. This lack of preparation can leave younger members feeling overwhelmed when it’s their turn to lead.

Running a family business can also seem like a burden. For some, the idea of constant problem-solving and stress may deter them from stepping into leadership roles. Younger generations may opt out of continuing the family tradition without excitement or encouragement.

Passing on the Family Business Successfully

The Harvard Business Review shared a story that highlights the importance of preparation. In one case, a family business expected one sibling to take over the company. Unfortunately, a tragic accident left that sibling unable to fulfill this role. The other sibling had no experience in the business but had to step in regardless.

This is one of many situations that can compromise your legacy. The article also discussed parents not properly including their children in decision-making, leaving them without leadership skills.

Depending on their parents’ relationship with work, children may be turned off by the perception of too much work for too little reward. Frank, honest conversations about the future are one key step in establishing a firm business legacy.

How Can You Prepare the Next Generation?

Passing on a family business doesn’t have to be stressful or uncertain. There are many ways to ensure that younger generations are ready to take over when the time comes. Consider the questions below to help you decide how to prepare your family for a successful business succession.

1.   Do Your Children Understand the Business?

Successful business succession planning requires that your successors know how the business operates. This can start at a young age by encouraging children to visit the workplace, meet employees and get a feel for the environment. They can begin with minor roles to gain deeper familiarity. However, you’ll eventually need to take their experience to the next level.

2.   Are They Gaining Leadership Experience?

Future leaders can’t just show up at the business and have functional roles. If you want someone to inherit the business, you need to give them decision-making responsibilities in different areas of the company. Having your children gain work experience outside the business may also be valuable.

3.   Do They Understand the Company’s Goals?

Regular conversations about the company’s mission, challenges and successes can help younger family members see the bigger picture. When they understand the company’s goals, they’ll be more prepared to make decisions that align with its future growth.

4.   Are You Setting a Good Example as the Business Owner?

Family businesses often involve close relationships and, at times, family conflict. Parents and business owners need to set clear expectations about business behavior and manage personal needs.

5.   Is There a Plan for the Future?

Most importantly, a clear business succession plan should be put in writing. This plan will outline who will take over leadership roles, their responsibilities and how the transition will occur. Without a formal plan, the business risks falling apart when it’s time to hand over the reins.

Act Today to Protect Your Family Business

Business succession planning is essential for the long-term success of a family-owned business. Whether your children are ready to step in or you’re just starting to think about the future, having a well-thought-out plan in place is key to keeping the business alive for generations to come.

Contact our firm today to schedule a consultation and learn more about how business succession planning can protect your company’s legacy for years to come.

Key Takeaways:

• Understand the Business: Involve younger generations early to familiarize them with the company.
• Build Leadership Experience: Offer opportunities for decision-making and managing key areas.
• Align with Company Goals: Share the mission and values to ensure that decisions support the company’s future.
• Set Clear Expectations: Address family dynamics to prevent conflicts from affecting business operations.
• Formalize the Plan: Create a written succession plan to ensure a smooth leadership transition.

Reference: Harvard Business Review (Sep. 27, 2022) “How to Prepare the Next Generation to Run the Family Business”