Aligning leadership priorities for a smooth transition of power in your family business

Building a successful family business takes time, strategy and sacrifice. Entrepreneurs face a multitude of challenges while growing a company, but one of the greatest is often succession planning.

According to the Family Business Institute, only 30% of family businesses make it to the second generation, 12% survive to the third and a concerning 3% make it to the fourth. Often, this die off is due to founders who don’t want to relinquish control and a lack of planning.

Succession planning is a complicated topic because of the emotional minefield it can become. When considering what’s best for the company, entrepreneurs have to take two perspectives into account: that of the older generation, who are comfortable with the status quo, and the younger generation, who are eager to prove themselves and impatiently waiting for their chance to lead.

Here’s what both generations should know about passing the torch from one generation to the next.

Why older generations struggle with succession planning

For entrepreneurs who have worked tirelessly to grow their business, stepping down is a difficult, sometimes it’s an impossible idea to comprehend. After all the sweat, blood and tears that most leaders put into their family businesses, it’s hard to imagine someone else taking over, even if the successor is part of the family. Recent research from RBC on succession planning showed that 33% of business owners put off succession planning because they’re not comfortable discussing finances, and 22% put off creating a handover plan because they don’t want to let go of control.

What are they afraid of?

Digging deeper into leadership fears, research from the Family Enterprise Foundation found that just over half of family business owners are concerned that the next generation isn’t ready to take over yet, while 39% think, or know, they’re simply not interested.

So what’s the plan?

Even with all these concerns, many businesses are preparing for succession. The study found that 60% of these family businesses still expect to hand off their company in the next decade. While some succession plans lead to drama – the Rogers family saga is a prime example – the leadership transition can be smooth, if planned properly. Here are some tips for the older generation to ensure a healthy transition of power:

Communicate effectively

When planning a leadership transition, it’s vital that all parties involved discuss goals, family values, and long-term visions. This way, business strategy can be aligned to these ideals and both generations will be able to agree on the best way forward.

While all members involved in the family business likely share the same values, the way these values are expressed may differ. Without proper communication, this discrepancy could lead to conflict. For example, while both the current owner of a family business and his son may share the value of business growth, the son wants to take risks and invest in new technologies, while the father is skeptical. To mitigate such disagreements, it helps if owners formalize the decision making process and clearly communicate the final decision to all parties involved.

It’s vital to have honest conversations about succession every few years to ensure all parties, including the new generation, are still passionate about the plan. As children grow, their interest in running the family business could change, which is why open communication is key.

Bring in outside help

According to The Harvard Business Review, which analyzed 30 years of research on family business succession planning, bringing in an outside perspective often helps ensure a smooth transition of power. Including unrelated employees in succession planning offers another, sometimes clearer, perspective on the policy changes and strategy shifts that often come with a new owner. It also helps open up communication between the owners and employees, which encourages loyalty and makes it easier for the new owner in the long-run.

Create a plan early and update it frequently

Even if the transition seems simple, owners should have a formal plan in place that details the method of transfer and includes a clear timeline. Everyone affected, both family members and non-family stakeholders, should be aware of this plan. We suggest relying on a team of financial and legal experts to create the plan and facilitate a smooth transition.

Once a plan is in place, owners should review it periodically and update accordingly. The recent health crisis nudged many businesses to take action. Angie O’Leary, head of wealth planning at RBC Wealth Management-US, said succession planning became more “top of mind” during this time, with many entrepreneurs revising wealth plans to ensure they incorporate any business or family changes.

The new gen’s perspective

The next generation of business owners are usually eager to leave their mark. They are more willing to take risks, trust in newer, innovative technologies, and are excited to grow their family company in unique ways. While this may make the older generation nervous – as change often does – it shouldn’t derail current leaders from passing along the torch.

One of the biggest concerns current leaders have is that their potential successors aren’t willing to run their business. Research by the Family Enterprise Foundation shows this isn’t always the case. After surveying 300 Canadian family-run businesses, the foundation found that younger owners are actually more interested in keeping their company in the family than their forebears.

When examining the next gen perspective, it’s easy to see why many future owners are impatiently waiting to take over. The Research suggests that the next generation is, on average, around 37 years old when they approach their families about succession. Here are some tips for future owners when preparing to take over the family business:

Decide what’s best for you first

While research has shown that many in the new generation are excited to jump into their family business, some may be hesitant to take over the reins. Before preparing for the handover, it’s important to consider how passionate you are about taking over the company. If your passion lies elsewhere, but you feel pressured to follow in your parents’ footsteps, the business may be affected in the long-term. In this case, an honest conversation with all involved parties is crucial before any succession planning takes place.

Be gentle when bringing up succession planning

The idea of succession can be a sore subject for owners, as it can feel like they’re being pushed out. It’s best to bring up the topic naturally. If you’re doing financial planning for your own family, you could involve your parents in the process. Rather than flat-out asking when you’ll take over, this is a more subtle way of broaching the succession discussion.

These discussions are important to have, especially since transferring a business has tax implications and will likely need to be approved by the board or shareholders.

Decide on the best way to gain the necessary experience to run your family business

For future successors, there are a number of different ways to train. Many are mentored on the job and slowly transition to management, making more business decisions as they mature. Managing lower-stakes projects is a good way to prove yourself and make mistakes without dire consequences. Work with the current owner to build family unity and create a culture of respect and trust, both for family and non-family employees.

Some families decide that future successors should work at other businesses to gain experience first. This can minimize criticism of nepotism and prepare the next gen for a broad range of challenges not experienced by your organization.

Family businesses should still be meritocracies, with the next gen earning their senior roles through proving themselves and reaching key milestones. This way, employees won’t resent the new owners for achieving something they feel isn’t deserved.

Succession planning with everyone in mind

Succession planning is a hard topic to discuss for current owners unwilling to give up control, and could be a sore topic for the next generation, some of whom are waiting impatiently to take the reins.

When planning your family company’s future, it’s essential to have a financial team you can trust. At Zeifmans, we understand the pressures and fears involved in ownership transitions, because we’re a family business too. Our experienced team is happy to guide you through the planning process. Contact us to get started.