When a small business is a key component of family
wealth, the owner usually has a strong desire to perpetuate it in one form
or another. But perpetuating the business through an orderly succession to
family members or other insiders is the ultimate management challenge. The
owner(s) must deal with business, family, tax, and estate issues when
planning for the succession of both management and ownership.
Any transition must preserve the continuity of leadership and it is most
important that the succession of ownership and management be perceived as
a process rather than an event. Much as some successors might hope
otherwise, it's not a matter of deciding to retire at 4:00 p.m. next Tuesday
at which time Junior will take the reins or your partner, Charlie, will
become the boss, while you'll fade into oblivion (or more likely onto the 10th
tee). Succession is a process requiring planning, teamwork, and constant
re-evaluation.
Planning for succession in a family business is a special situation of the
first order. So infrequently is it done successfully that barely 30 percent
of family businesses survive into the second generation and fewer than 15
percent of them endure into the third. This is a sad fact not only for the
families but for the nation's economic health, since much of our economy is
made up of small, family-owned businesses. If the business of succession is
not done by process (through planning), it will be done by crisis
(a failure to plan), with perhaps disastrous results.
You may decide to take the external route, selling the business
(depending on how it's organized) to your employees (via an ESOP), to your
competitors or other third party (outright), to your partners (via a
buy/sell agreement), or to the public (via a stock offering). But for
purposes of our discussion here, we'll assume that part of your overall plan
for preserving your personal wealth is to pass your business on to your
progeny, taking the internal path to keeping both the wealth AND the
business your worked so hard to build "in the family."
A typical succession plan has two elements, which should be considered
separately:
- The transfer of power, whereby control over the
business's operation is transferred to those best suited to exercising it
- The transfer of assets, whereby the wealth
concentrated in the business is transferred to designated family members,
who may be a different or larger group than the person or persons who will
be assuming power.
The former is an art, the latter a science.
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