The heart of the West Michigan business community and economy is the family owned business. These businesses range from small start ups and mom and pop retail establishments to billion dollar worldwide enterprises with hundreds of employees. Many families have successfully passed these businesses from one generation to the next and are now owned and operated by the third, fourth, or even fifth generation of owners.
Families that successfully pass ownership of the family businesses to a second generation beat odds that are stacked against them, as less than a third of family owned businesses are eventually owned and operated by a second generation of family members. Family owned businesses that are successfully transferred to another generation share a common trait: as business people they make planning for succession of the business an important part of their business plan, and as family members they make succession an important family value. However, many families find it difficult to get started.
When to Begin
Each succession plan is unique to the family and business involved in the plan, and this is reflected in how and when people begin. Most commonly, however, the planning for succession begins when the senior generation is in its mid to late fifties. This age works because it frequently coincides with the ages when children become adults, make career choices, and begin to demonstrate their potential and ability to assume the responsibilities of ownership and leadership within the family business.
Planning can, of course, begin earlier or later. But plans begun too soon may result in the senior generation feeling "pushed out" or the younger generation being given ownership and management responsibilities before they have demonstrated the ability to assume them or are ready to assume them.
Planning that is delayed until the senior generation is in its mid 60s or later can result in a great many difficulties. For example, children who are in their 40s and who see no firm plans for transfer of the business may become frustrated and leaving the business for other opportunities. Delayed planning also can lead to a rushed transfer of ownership or management when unexpected health problems or death can force a rapid transition of ownership and management. Businesses run by family members in their 70s may lose out on the benefit of fresh thinking and ideas from the energy provided by new management or ownership. Delayed planning also can reduce the options available to the family and may make transfer tax planning more difficult.
Ultimately, the time to begin the succession planning process is when the senior generation is prepared to transfer ownership and management and the next generation is ready to assume the responsibilities of ownership and management. However, it is best if it begins before intrafamily demands or pressures, health problems or business problems create an environment in which the planning becomes more difficult. Therefore, the earlier the senior generation begins to consider the possibility of transferring the business and creating and implementing a plan, the more likely it is that a plan can be developed into which all of the constituencies (family, owners, and management) will buy in and the business will be successfully transferred.
How Long Will It Take?
Succession planning is a process, not an event, and involves several elements:
- A plan for transferring the ownership interests in the business
- A plan for transferring the management of the business
- A plan for addressing the financial security needs of the senior generation
- A plan for addressing income, gift, estate, and generation skipping taxes
- Strong family relationships
The amount of time it takes to prepare and implement a plan that takes these elements into account also will vary from family to family and business to business. The actual amount of time required is proportional to the motivation of the family members to complete the process, the effort expended by them, and the position from which they start the process.
If the senior generation has acquired sufficient assets outside the family business to support their income requirements in retirement, if sound management is in place to carry on the operation of the business, and healthy family dynamics exist, the development of a plan for the transfer of ownership in a tax advantaged way can be accomplished quickly. In this situation, the time for development of a plan and its implementation could take as little as six to twelve months.
If, however, management is heavily dependent upon the senior generation, time measured in years may be needed to develop the management team needed to successfully carry on the business without the senior generation. Similarly, if there is disagreement among family members about to whom in the family the business should be transferred, or the roles for members of the family in the business, the family will need time and perhaps outside assistance from family business advisors or consultants to work through these issues before a plan can be developed. This time will, of course, lengthen the time needed to develop and implement a plan.
In our experience, development of a plan for succession of the management and ownership of the business will take a period of time for introspection and reflection, intra-family dialogue, and consultation with the family’s business, legal, and financial advisors. Six months or a year is not unusual or inappropriate for this stage. Once consensus among the family, owners, and management is reached about the objectives, strategies, and action steps, implementation of the plan can proceed. In some cases, where a sale to family members is involved, the succession can occur in a matter of months. In cases where the plan involves more elaborate ownership transfer strategies, grooming or recruiting of another generation of management, or financial planning for the senior generation, implementation of the plan will play out over a period of years.
Planning for the succession of the management and ownership of the business is one of the most important strategic planning activities in which a family business can engage. For families who seek to transfer their business to the next generation, the hardest step is the first one. Although starting the process may be difficult, the benefits of doing so are many, and beginning the process early and proceeding diligently is essential.