Studies show that, in the next decade, nearly 250,000 Connecticut residents will turn 65—an unprecedented number that will be the inevitable result of the baby boomer generation fully reaching retirement age.
As our state’s population continues to trend older, this will no doubt have an effect on the business community, particularly the large number of family owned businesses belonging to the people falling within this demographic group. Nearly two out of every three businesses in Connecticut are family owned, and the bottom line is clear—family business is big business, both in our state and across the country.
What happens when these business owners, many of whom created and grew these businesses as their life’s work, decide it is time to retire? Does the business pass on to a family member? Is it sold to an outside party? What happens to the employees? What do the next few years hold for this business? These are the basic questions that must be asked when a family business begins planning for a transition.
Here’s the problem, though. As of today, roughly 80% of all family owned businesses nationally-and a similar amount here in Connecticut-have no plan for succession.
This needs to be addressed, and the sooner the better. The time to start planning for a business transition is not down the road, when retirements or changes happen, but rather as soon as possible.
A recent study that our firm developed with Baker Tilly International indicates that, while this alarming number of businesses have not yet begun the planning process, there are serious advantages to those businesses who start that process several years out. This is a never-before-seen generational shift we are experiencing and will continue to experience through 2025, and it gives businesses the impetus to put these plans in place.
What’s more, the traditional path of family businesses transitioning to family members is no longer as seamless as it once was. Rather than handing over a business, what is passed on today are the skills and desire to be in business. Businesses need to keep this in mind as they begin the transition period.
Succession planning does not mean retirement, at least not right away. It means preparing for an inevitable transition, and readiness is always essential. Succession planning today is all about instilling business competencies and experience in family members who are interested, rather than simply handing over the business. There are a number of considerations which family owned businesses need to address upfront-does the next generation (a child or other relative) want to take over the business? Is the next generation ready to take over, or possessing the skills to one day do so? Is an outside party, such as a private equity firm, the solution instead? If so, what does that mean for the workforce?
All of these questions need to be addressed. Succession planning is an involved process, but, if done correctly and strategically, the chances for success increase exponentially. This means goals need to be set, tactical timelines need to be put in place and family harmony must be maintained as the process gets underway.
Again, the advantages of early planning are numerous, such as ongoing profitability, strong familial relationships and long-term job security for the employees. On the other hand, failure to plan can have serious repercussions-businesses can lose competitiveness, family conflict can ensue, profitability can decrease, “decisional paralysis” can ensue, and ultimately the business could even fail if no plan is established.
This is a new era for family business, in which many more questions need to be addressed than in the past when it comes to who takes over and when. The skills required by the current generation for a proper succession are more complex than ever; they need to ensure the business is ‘succession ready’ for either transition or market sale. And the time to start planning is right now.