Succession Planning for Family-Owned Businesses

April 15th, 2017 | posted in: Wealth Strategies

by: Ashley Moore Remmers

If you own a business and hope that ownership by your family continues beyond your tenure, there are many questions to consider as you begin to transfer it to another generation.

Management Succession

First, take an audit of contributing family members to confirm their interest in continuing to work for the business. Consider as well any family members who would like to begin working for the business who bring specific knowledge or skill sets that would be valuable. From there, you should identify which if any family members are on track to move into senior management who can be a part of a succession plan.  If those who are candidates to take over C-suite roles do not have adequate training, it may be helpful to bring in a mentor or coach who can assist with shoring up the deficits.  A third party who has a neutral lens can objectively review the management team as well as family members to see what roles are best served by each member as well as to improve how the team works together to ensure success in the transition.

Economics of the Business

The business should be making a competitive profit and the shareholding family should benefit from the profit.  The compensation structure for management should be devised accordingly.  For a family-owned business where there are family as well as others in management, a governance system should be set in place to be sure compensation is fair for all. Incentive profit shares to management are crafted well when they include a reasonable minimum rate of return on equity for shareholders.  A rate of return on equity for shareholders would contemplate both cash dividends and share price growth. Using external benchmarks and metrics to provide data on expected and reasonable performance helps management and family establish a mutual sense of fairness. And if you have any independent members on your board of directors, they are often the best group to serve on a compensation committee mandated to create a system that is fair.

Control of the Business

Another key piece to consider is the structure of control and governance. Your family may not be ready to govern entirely without you. For starters, you can remain involved as the Chairman of the Board. You can also restructure your common stock shares into voting and non-voting shares so that you can sell or gift your non-voting shares while retaining the voting shares for control. You could also explore independent board governance where individuals outside of the family are brought in while you wind down your leadership role in the business and transition it to the next generation. Including external advisors has the added benefit of enriching board discussions with objective advice and diverse viewpoints.

It’s never too early to start thinking about the transition of your family business to subsequent generations.   Planning five to ten years in advance will provide the time you need to transition of your business smoothly with the greatest chance of its continued success.