Too Many Family Businesses Are Without a Succession Plan

The majority of family businesses in the U.S. do not have a proper business succession plan in place for senior roles, according to a recent report from PricewaterhouseCoopers US Family Business Survey. In fact, 73 percent of family businesses found themselves without a documented succession plan – a trend financial professionals must help their clients combat.

“We are seeing an increase in what we call the ‘sticky baton syndrome,’ where the older generation hands over management of the firm in theory, but in practice remains in control of what really matters,” Alfred Peguero, PwC’s US Family Business Survey Leader, said in a media release. “As the generational gap widens, the period between each transition gets longer. This means potential successors often are excluded from hands-on involvement and lack the experience needed to run a company.”

This view is echoed by survey results showing 2 in 5 respondents see fully handing over control of a business to their successors as a challenge. Meanwhile, nearly half of next-generation family members view succession as difficult because of the increasing age gap between current leadership and those who are supposed to succeed them.

“There needs to be a flexible long-term succession plan that includes rotations in senior management positions across the business, in addition to having work experience outside the family company,” Peguero continued. “This will not only transfer valuable skills, but also help successors gain credibility and trust among key stakeholders. Our data shows that too many family businesses don’t yet have this level of planning in place.”

Boosting morale with business succession planning

Another factor financial advisors should help their clients understand is how a properly structured business succession plan can lead to benefits reverberating throughout the entire company, not just in corporate offices and boardrooms.

Research from Bersin by Deloitte recently showed that business succession planning can significantly influence employee engagement and retention, especially when succession planning goes beyond just high-level senior roles.

“The top two benefits of effective succession management in these high-performing organizations are improvement in employee engagement and improvement in career development opportunities,” Kim Lamoureux, vice president of leadership and succession research at Bersin by Deloitte, said in a press release. “This is good news, because it means that sophisticated succession management programs address the number two priority – after leadership gaps – previously cited by HR leaders in Deloitte’s Global Human Capital Trends 2014 report: retention and engagement. Employees who are provided with performance feedback and are alerted to potential future opportunities within the organization are more likely to be engaged in their work, and therefore more likely to stay with that organization.”

With 18 percent of survey respondents telling PwC they are planning to pass their company on to the next generation during the next five years, now is the time for financial professionals to buckle down with clients to draft a tailored gameplan for business succession.

Where to start?

For most clients, there will likely be two key areas of focus when it comes to business succession planning: family and finances.

If a business is family-owned, the former will likely be weighing most heavily on client minds. In order to both ensure the continued success of a business and minimize the chance for discord among family members, it’s vital for business owners to start their planning sooner rather than later. A detailed succession plan should exist well before the process gets underway, allowing different relatives to understand how things will change and come to terms with your client’s decisions.

For clients who want to make sure their children are treated fairly during the business succession planning process, estate equalization is one option to keep in mind. In situations where a business simply can’t be passed on to the next generation equitably, or children don’t wish to be a part of the family business, life insurance can create liquidity that can be used to ensure beneficiaries receive compensation in place of ownership of the business. Such a strategy helps clients cover their bases in both business succession and estate planning.

Meanwhile, where finances are concerned, many clients will typically be wondering how best to cash out of their role as business leader and enter retirement. One popular option is instituting an Employee Stock Ownership Plan, or ESOP.

The National Center for Employee Ownership reports that these plans are less volatile than other investment vehicles and typically have higher rates of return. As a bonus, ESOPs are often found to improve employee morale, as well. By providing workers with a greater stake in a business’s success, owners encourage better performance and greater loyalty.

Seventy-three percent of survey respondents told PwC that the cultures and values in family businesses are stronger than those found in other types of companies. This may be true, but without the right business succession plan in place, those cultures and values are in danger of coming to a quick and undesirable end.

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