According to an article published in the Minneapolis/St. Paul Business Journal, there are 5.5 million family-owned businesses in the United States which generate approximately 57 percent of the nation’s gross domestic product. Succession planning, while important for any company, is absolutely critical for a family-owned business. Family businesses “have the most to lose” when an experienced and seasoned leader steps down and there is no business succession plan in place to guide the next generation of leaders. While around 30 percent of family-owned businesses survive the transition to the next generation of leaders, only 12 percent survive to the third generation.
In far too many instances, a business owner has a succession plan that has become far too outdated to be useful. Even worse is the fact that many business owners have not taken the time to create any business succession plan at all. According to the American Bar Association, wise business owners will take the time to put in place a written business succession plan covering the key issues of management succession, control, business valuation and employee compensation matters.
One additional issue of crucial importance to succession planning for family-owned businesses is to address the proper allocation of voting control. The trick is to give those who are active in running the business the authority they need to fulfill their responsibilities without giving them enough power to abuse their positions. In other words, care must be taken to protect non-controlling owners by giving them input on matters such as compensation, dividends and distributions.
A recent article published in Forbes indicates that the average age at which the leader of a family owned business passes control is 62. Handling over the business to the next generation does not necessarily mean that the family patriarch or matriarch needs to settle into a rocking chair. Thirty-two percent of business owners who have passed on the baton of leadership continue to exercise some degree of influence on the company behind the scenes in an effort to both guide the next generation for a time and to avoid a jarring and rough transition period.
Professor James Lea, the author of an article published in the Minneapolis/St. Paul Business Journal, offers the following suggestions for leaders of a family owned company who are contemplating handing over the reins of the business to the next generation of family members:
- Work hard to properly educate the next generation of family members about the company’s history, its business model and its values and practices.
- Make it clear that any family member who wants a job in the family’s business needs to show that he or she is qualified for the job and is committed to the success of the business.
- Keep in mind that a capable non-family employee who likes his or her job is worth several family members who are merely “along for a ride on the gravy train.”
- Try to encourage mutual respect among family members who will be taking over leadership roles in the business and teach them how to forgive honest business mistakes made by other family members.
Seeking legal counsel
If you are the owner of a business that you desire to pass on to future generations of family members, you should contact a Minnesota attorney experienced at handling business law matters. The attorney can offer you advice and guidance as to how to structure a business succession plan in order to protect both family members and the business itself following your retirement.