Family business is big business in America. While many may think the country’s business landscape is dominated by large, public corporations with billion dollar operations and thousands of employees, the truth is two-thirds of all businesses are small- to-mid-sized and family owned. That translates to between 70 and 90 percent of our annual Gross Domestic Product (GDP).
One challenge these family owned businesses are now facing is what happens when the current generation of leadership retires. Will the sons and/or daughters take over? Will it remain partly in the family with other relatives? Will the next generation be unwilling (or perhaps unqualified) to run the business, requiring current management to consider selling or looking to outside investors?
These questions are extremely important and extremely real, and they point to one clear business strategy that must be employed-succession planning.
Succession planning in family business, preparing for a transition in leadership, is the pathway towards ensuring the business’ long-term success and viability. And today it is more important than ever. With the first wave of baby boomers now reaching retirement age, an unprecedented generational shift is occurring right now in family owned businesses, and is expected to last for the next decade. This is why preparing for a transition isn’t just a luxury; it needs to be treated with urgency.
The challenge we are seeing right now, and clearly identified in a recent report our firm commissioned with Baker Tilly International, is that businesses do not seem to be in a hurry to begin the transition process. Nearly 80 percent of family owned businesses are not prepared for what happens when current management steps down. This needs to change.
The report, entitled Succession Reset: Family Business Succession in the 21st Century, finds the goal of succession planning today is instilling business competencies and experience in family members who are interested. This is a change from previous generations, in which the practice was often simply handing it down to the children.
It’s important for businesses to understand that succession planning does not mean retirement, at least not right away. It means preparing for an inevitable transition, and readiness is always essential. Goals need to be set, family harmony must be maintained as the process begins and the right questions must be asked throughout to ensure everyone remains on the same page and no one gets lost.
The process does not need to be a grueling one, but simply needs to be strategic, deliberate and detailed. Families need to establish goals and the proper framework for executing a transition. They need to adapt their needs to their own capabilities, in order to gauge which members are best suited to continue in management once the transition begins. They need to establish a “wealth map,” show how control will be transitioned and create a future that remains viable and competitive.
The advantages of early planning are numerous-continuing profitability of the business, maintaining good relationships within the family, peace of mind for employees and long-term job protection. Conversely, the risks of failing to properly plan are equally daunting-loss of competitiveness, family conflict, loss of wealth, decisional paralysis and, ultimately, loss of the business.
The good news? There is a clear roadmap now to which family businesses can adhere to ensure a proper, well-executed succession. The key is preparation, and it is never too early to start planning for the transition process.
The coming decade will be unprecedented in terms of the number of people readying for retirement and the number of businesses which will be impacted by those retirements. Those who start planning now will be the ones in the best shape for the future.