Securing a legacy

Jayne McQuillan

Guest Columnist

July 29, 2024

Family businesses are a cornerstone of economies worldwide, contributing significantly to job creation and economic stability.

Consider these statistics from the Conway Center for Family Business, family businesses:

• Account for 64% of U.S. gross domestic product
• Generate 62% of the country’s employment
• Account for 78% of all new job creation
• Make up 90% of all business enterprises in North America

The impact of family businesses on our economy is evident.

These businesses have longevity, with 30% of all family-owned businesses making the transition to the second generation.

Family businesses create wealth, as they tend to create strong entrepreneurial activity over time.

They tend to have strong cultures and focus on the next generation, not the next quarter.

According to the 2023 National State of Owner Readiness Survey conducted by the Exit Planning Institute, 75% of business owners would like to exit their business within the next 10 years.

With a considerable number of those businesses being family-owned, the potential economic impact of unsuccessful transitions is significant.

Transitioning a family business from one generation to the next presents unique opportunities and challenges.

A family-owned manufacturing client of ours had been owned by two brothers, and due to unfortunate circumstances, they ended up selling the business to the next generation.

There were many mistakes made in this transition, including the exclusion of an “emergency” plan should something happen.

One of the brothers had a serious accident limiting his ability to work, and the other died of cancer.

Without planning, the next generation – four family members – purchased the company at a price significantly above market.

This price was determined by the needs of the exiting owners and their heirs, not what the business was worth.

The salaries were set the same, regardless of position – from president to shop floor worker.

The only person contributing value at their level of compensation was the president.

All other positions held by family members were overpaid, and the individuals could not perform their roles.

There were no means by which conflicts were managed, there were significant unresolved issues and the business was on the verge of collapse.

This was not a good starting point for a transition.

Fortunately, they engaged experts to help them through the challenges and have since grown the business exponentially.

Weighing pros and cons of family transition

Positives to a family transition

• Legacy and continuity – Family businesses often carry a strong sense of tradition and pride. Transitioning to the next generation preserves family values and culture.
• Loyalty and commitment – Family members typically show deep-rooted commitment and dedication, essential for business success. “I can’t fail my family business.”
• Long-term vision – Family businesses usually focus on long-term sustainability rather than short-term gains, leading to stable growth. 
• Trust and cooperation – High levels of trust and cooperation among family members can lead to efficient decision-making and a harmonious work environment.

Challenges of a family transition

• Emotional challenges – Mixing family dynamics with business can lead to conflicts and emotional stress, impacting both operations and relationships.
• Lack of objectivity – Decisions influenced by familial ties rather than merit can lead to appointing less qualified members to key positions.
• Succession issues – Choosing a successor can be contentious, especially if multiple family members are vying for leadership roles, causing division and impacting stability.
• Resistance to change – Established family businesses might resist new technologies or innovative practices, hindering growth.

With these unique dynamics, advanced planning is critical to mitigate the risks associated with family business transitions.

Without a well-thought-out plan, businesses can face disruptions jeopardizing their future.

Here are a few key considerations to consider when planning a family business transition:

• Clarity of roles and expectations – Early planning defines roles and responsibilities, reducing ambiguity and potential conflicts. 
• Business continuity – A structured succession plan ensures operational and profitable continuity during the transition period. 
• Financial security – Proper planning addresses financial issues like tax implications, retirement funding and equitable asset distribution.
• Maintaining family harmony – Transparent communication and clear plans help maintain harmony, ensuring personal relationships are not adversely affected

Here are a few strategies to consider for a smooth transition:

• Develop a succession plan: Outline key roles, the transition timeline and necessary training for successors.
• Involve professionals – Engage a certified exit planning advisor, legal counsel and financial and tax advisors to manage complex issues such as family dynamics, estate planning, tax strategies and governance structures.
• Foster open communication – Regularly hold family meetings to discuss expectations, plans and concerns openly.
• Provide training and development – Invest in the education and professional development of the next generation. This helps ensure they are well-prepared to take on leadership roles and drive the business forward.
• Create a governance structure – Establish a family council or board of directors to oversee the transition and make unbiased decisions.
• Plan for contingencies – Develop contingency plans for unexpected events, including interim leadership and business continuity strategies.

Transitioning a family business is a complex process requiring careful planning and consideration.

Though the journey can be fraught with challenges, the rewards of preserving a family legacy and achieving long-term success are well worth the effort.

By understanding the pros and cons, prioritizing advanced planning and implementing effective strategies, family businesses can navigate transitions smoothly and thrive for generations to come.