Succession Strategy for Family Owned Businesses

Friday, January 17, 2014

As the sole owner of a multi-generational small family business, many owners hope one or more of their children will desire to follow them into the business and take over direction of the company at some point.  Small business owners are often concerned with safeguarding the continued operations of an organization that has possibly taken many decades to establish.  Often such businesses have a small but highly dedicated workforce to whom the owner feels a strong commitment and attachment.  Owners may be concerned with any transfer of ownership that might endanger the ongoing operations of the business and the employment of workers who may have given years or decades of their lives to help make the organization successful.  However, today’s reality is that many children have no desire to follow in the footsteps of a grandparent or parent into the family business.

While there are a number of legal and tax implementations for the transfer of ownership and control of any business entity, family owned businesses are at greater risk than other organizations.  Professional advice for tax, legal, governance, and succession issues and planning should be sought out early and updated as circumstances change.

Unique among organizations, small family businesses often rely on a few key long term employees who have helped build and maintain the operational success of the enterprise.  Such key members of the business’ talent team recognize the risk to the organization and their own self preservation should the organization fail due to the lack of succession and transition planning.  However, one of the greatest risks is the child who succeeds the parent may not have the same passion, desire, motivation, knowledge or skills needed to successfully run the business.  Concerned with their own self preservation, key talent members may look elsewhere taking with them not only their talent but competitive knowledge.

Retention of this cadre of employees is essential to any transition of any business, especially for a small family owned and closely held organizations.  Due to their roles in the organization key talent members may be acutely aware that some transition of leadership or ownership is imminent.  Retention bonuses work well if the goal is to maintain a core of individuals through the initial changeover from the prior to the new ownership team.  However, when that change is from parent to child, the changeover is more about who is at the helm rather than who or what owns the business.

Small family business owners are often reluctant to give up any portion of ownership, a.k.a., control.  Nevertheless, if the goal is to save the organization, distribution of ownership to a select group of non-family members may be the only option.  The “family” can maintain majority ownership while sharing minority control to those key members of the business.  So what was once planned to be “Smith and Sons” may become “Smith, Jones, and Wilson”.

Survival of a small family business hinges on the commonly shared vision of Smith and Jones and Wilson.  Even as minority owners, Jones and Wilson have a strong motivational buy in to its continued and long term success.