Every two years (since 2008), PricewaterhouseCoopers, LLP, surveys key decision makers at family businesses across a range of industries. The 2014 survey (which surveyed 154 businesses) examines a number of issues facing family businesses, including the need to adapt to an increasingly digital world, recruitment of skilled personnel, market conditions, competition, exports, government regulations and succession planning.
With respect to succession planning, just slightly more than 33% of the family businesses surveyed have an appointed successor, and only 27% have a documented succession plan for senior roles. That’s not good when you consider that 66% of those surveyed were more than 50 years old; and nearly 75% of those surveyed were “contemplating” transferring the business to the next generation. Some of the delay in addressing succession planning was due to the fact that some parents are unsure if they even want their children to take over the business.
That’s why family business owners should be urged to bring their children into the succession planning conversation early. Such advance planning will help to minimize family squabbles in the future. Succession planning is often an emotional issue, particularly when only some of the children are active in the business. Not only does the business owner have to decide which child or children are fit to run the business, but also how to treat the other children fairly (if not equally). In the survey, 40% of the business owners anticipate staying in the family business longer than they like to, just to ensure a smooth transition to the next generation.
One of the more interesting facts of the survey is that 60% of the family businesses have family members who hold an ownership interest in the business but do not work in the business. Obviously, for those businesses, mechanisms need to be established to address conflict between those family members who are active and those who are not. The businesses interviewed reported that shareholder agreements are by far (67%) the most widely used mechanisms to address conflict. Another way to minimize conflict is to establish a compensation policy that’s commensurate with the fair value of the active family member’s services.
The importance of succession planning goes beyond keeping the family business in the family. A 2014 poll revealed that small business owners don’t save enough for retirement. The poll conducted by CNBC and the Financial Planning Association sampled 178 financial advisers nationwide that service small business clients age 35 to 70. According to the survey, a whopping 70% of small business owners’ wealth is invested in their business. Thus, if the succession plan fails, so may the business owner’s retirement plans.
A succession plan is of no use if it exists only in the business owner’s mind. The plan needs to be formalized in writing and communicated with family members, key employees, customers and suppliers. The plan should include a timetable of necessary actions. That is, what course of action the business owner plans to take, when and how. Finally, it’s important for the business.
About the author
Julius H. Giarmarco, J.D., LL.M., is chair of Giarmarco, Mullins & Horton’s Trusts and Estates Practice Group in Troy, Michigan. Julius received his law degree from Wayne State University, and his master of laws from New York University. He is licensed to practice law in both Michigan and New York. Julius’ primary practice areas include estate planning, business succession planning, wealth transfer planning, and life insurance applications. Julius can be contacted by email or by phone at (248) 457-7200.