Succession Planning to Survive Uncertainty

If the last few years have taught us anything, it’s that we can’t easily predict economic trends. From market gyrations to supply chain disruptions to mounting inflation, it’s been an uncertain stretch for middle-market companies.

For owners of family businesses, whose wealth is largely tied to their organizations, the experience has been particularly jarring. As their companies’ valuations fluctuated, many struggled to plan their own retirements and lay the groundwork for heirs to step in.

Businesses without defined succession plans were particularly disadvantaged. Those companies aren't alone. Nearly two in five US family-owned companies need a clear business continuity strategy. Fortunes and legacies are at stake.

Building a Succession Plan

The longevity of American family businesses might seem inevitable, but only 40% reach a second generation, and just 13% enter a third era of family stewardship. That false sense of durability can inhibit the development of a formal plan.

Generational transfers demand careful, timely consideration. A strategic plan that safeguards a company’s reputation, enables shareholders to plan for retirement, alleviates familial friction, and prevents the unnecessary dilution of assets can take years to put in place.

For a family business to sustain and thrive in any market, early action and careful reflection on key concepts can be critical.

1. Identify key stakeholders and potential successors.

Engage all critical players early in the planning process. Current owners and senior management are obvious participants, but the next generation of leadership should also have a seat at the table. Some family businesses may already have a sole heir apparent, although that’s not always the norm. So make sure you're casting a wide enough net - both with family and non-family members.

Finding successors who can not only maintain a family business but also hold leadership positions in challenging economic and competitive climates is arguably the most crucial consideration in ensuring long-term prosperity. Succession candidates should have the soft skills and key competencies to uphold a company's culture and ensure a smooth transition. 

2. Understand individual goals.

Know where everyone stands and what they ultimately want – intrinsically, financially, and otherwise. That helps clarify whether the right people are actually on board.

All involved parties should be expected to at least answer the following questions:

• What are your expectations for growth within the company and/or retirement?
• What is your ideal timeline to achieve those goals?
• What is your vision for the company?
• If you currently have an ownership stake, what are your financial needs/aims?
• How/when do you foresee a potential divestiture?

Ideally, the exercise will highlight areas of alignment and help build consensus on shared priorities.

3. Review the state of the business.

Members of a succession-planning team should at least have a basic understanding of the family business’s standing and outlook. That includes the company’s valuation, finances, core assets, key relationships, competitive set, and forecast.

This is also an opportunity to consider what makes the company unique beyond standard metrics. What brand elements and cultural attributes drive value and need to be preserved? Is the company’s identity tied to a few people or broadly internalized?

Intellectual honesty is vital in this stage. To build a realistic strategy, participants need to understand and trust a shared set of facts and core assumptions.

4. Envision the company’s future.

Everything leading up to this stage has been a reality check. Now the real work begins. In addition to growth targets and expansion goals, this projection should incorporate individual timelines and the perceived talent pool to shape the company's mid- to long-term outlook.

The deliverable is a vision statement that’s aspirational yet attainable. It isn’t a fully articulated plan, but details should be concrete enough to debate, revise, and ultimately coalesce around. From here on, the planning process is about mapping a path to this goal.

5. Explore equity transfer options.

In addition to general business and human capital planning, a succession strategy depends on mechanisms to efficiently transfer equity to the next generation of owners.

Various options should be considered, including:

• Passing ownership via a gift or trust
• Full or partial sales of equity to family members, key employees, or outside parties
• Formalized employee sale programs, such as employee stock ownership plans (ESOPs)

Each method carries its own benefits and disadvantages, but the taxability of a potential transaction often looms large. For example, private buyouts can provide substantial payouts to selling shareholders, but the sale is subject to capital gains taxes.

A Succession Plan is Only Valuable if it’s Implemented

A well-crafted succession plan is worthless if a company’s leaders don’t follow through. Clearly defined responsibilities, timelines, and performance goals are critical, but unless all parties are aligned and prepared to work toward common goals, a good effort will be wasted.

Of course, no one has a crystal ball to predict future market twists and turns. It’s unrealistic to expect a 10- or 20-year plan to be etched in stone. But when family-owned companies build actionable, adaptable plans and commit to an ongoing regimen of refinement, they’re more likely to come out ahead.

Plan for Success in any Economy

A multi-generational company is often a family’s biggest asset. Decoupling members’ personal net worth from the business and transitioning leadership through a planned process are keys to sustainability. 

Family businesses should also consider engaging relevant professionals to help drive and optimize their succession process. Professional third-parties, such as wealth advisors, tax planners, attorneys, accountants, and investment banking professionals, offer specialized expertise and can serve as impartial arbiters and sounding boards.

A sound succession planning strategy, implemented as early as possible, provides all stakeholders peace of mind and a better chance of weathering turbulent times.