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SUCCESSION PLANNING IS
THE KEY TO THE SURVIVAL
OF A FAMILY BUSINESS
BY JOHN SAVIGNANO, CPA
A great obstacle for family businesses is passing the torch successfully
from one generation to the next. To overcome this challenge, family
businesses must engage in succession planning and recognize the special
“people” aspect of this planning.
While succession planning involves buy/sell agreements, estate planning,
etc., it also involves taking into account the people and the family dynamic
involved in transferring a business from one generation to the next. In many
cases this is the most challenging issue. The following are some best
practices the family business should not ignore. These steps need to be
modified based on the size of the business and the complexity of the
transition.
COMMUNICATE
Communication is vital in a family business because there may be
misperceptions when transferring the business from one generation to the
next. The second generation of family business employees may think they
are ready to take over the reins and are going to be handed the keys to the
kingdom any day now. The first generation may think these youngsters are
not ready. These opposed perceptions are due to a fundamental breakdown
in communication.
The business owners of the business must communicate to the future
leaders their exit plans and vision for the transition. Realistic assessments of
talent (or lack thereof) and how to improve such shortfalls, as well as how to
accommodate the desires of the generation in control, must be openly
discussed and addressed. The future leaders must communicate their
expectations. If not out in the open, the assumed future leaders of the
business will exit out of frustration that their day to lead may never come.
ENSURE COMPLIANCE
Before you can transfer the company to the next generation, you must
have something of value to transfer. The company must be in compliance
with all laws and best practices. If not, you are simply passing problems to
the next generation. Worse yet, you may be transferring a business that
simply can’t succeed into the future.
SOMEONE MUST OWN THE SUCCESSION PLANNING PROCESS
In a family business it makes the most sense for members of both
generations to lead the succession planning effort. This assumes the older
generation sees the need for the process and recognizes the time is right.
Until this happens this process cannot progress.
This planning should start with the leaders of both generations. Having a
smaller group makes it easier to lead a process like this. Meeting times
should be formally set so the press of business doesn’t derail this process.
Once a basic plan is set, meetings with all of the family members are needed
to plan/discuss the steps needed to ensure a successful transition and agree
upon a timetable. If needed, and the company can afford it, an outside
mediator should be considered to help this process. These meetings also
allow each member of the family to relay expectations and concerns
regarding the transition.
ENSURE THE NEXT GENERATION IS ADEQUATELY
TRAINED TO LEAD
Most family businesses put off succession planning because it can lead to
family drama. If one family member is chosen to be the next CEO, this
means others were rejected. This creates family drama because the chosen
one may be perceived as the favored child and this causes problems at home
and at work.
However, no matter who is chosen to lead the company into the next era,
the leader must be adequately trained. In a perfect world each family
member would work outside of the family business before working inside.
This give the family member employee a broader and better perspective on
how businesses run. Consider having each family member learn jobs in
every department of the company. If family members have outside
experience and intimately understand how the business is run, nonfamily
members are more likely to respect the family members and see that they
have “paid their dues.” These steps may be the best options for minimizing
resentment from nonfamily members toward the family.
John Savignano is a partner with Savignano Accountants & Advisors
located at 47-46 Vernon Blvd., Second Floor, in Long Island City. If you have
any questions or require additional information, please call John at
718-707-0955.
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