Constructed well, a succession plan for your family business is not just about ownership and control; it also can nurture future talent and operations.
Often, the long-range vision for family business owners is to keep it in the family: for the rising generation to assume ownership and control when owners no longer can or want to continue running the business. But sustaining the business depends on more than establishing new ownership and control, which can happen during life by gift or sale (or a combination of both) or at death by bequest.
Future operation of the business and nurturing talent are other keys to its success. Continuity requires a carefully constructed plan of succession that takes into account family members, non-family key employees, and important third-party stakeholders.
Here are some important dos and don’ts to consider when putting together a family business succession plan:
- Do set clear expectations with family members. Family members may assume that they will take over the family business, and potential sense of entitlement and the resulting dynamics have caused many businesses to suffer. Establishing a plan for family members early and effectively communicating it often is a good way to manage expectations about job roles, leadership advancement, compensation, future ownership and control of the business, and business stewardship.
- Don’t neglect key employees who are not family members. Times of transition may lead to uncertainty as new family members assume control. For many family businesses, the next generation of leadership may come not from the family, but from non-family key employees who provide the knowledge, skill, and experience necessary to support the transition of the family business to the next generation. Take steps to help employees who play a key role feel valued and able to see a bright future for themselves rather than a glass ceiling.
- Do create a family employment policy. By setting expectations for family members entering the business, a family employment policy can help owners avoid uncomfortable dynamics that may arise from a lack of clarity. The policy should address requirements for family joining the business, such as gaining outside experience relevant to the business. Among other components, the policy should establish compensation expectations and performance guidelines, provide a process for leadership and control opportunities, and highlight any potential privileges afforded to family members engaged in the business.
- Don’t manage family members differently. Suspicion of nepotism can be a key concern for family businesses, and the family employment policy can require that family members follow rules established for all employees. Consider having non-family members manage family employees and review their performance and preventing use of family connections to circumvent direct supervision. This practice can mitigate potential for bias and allow non-family managers to do their jobs and continue to feel valued. Of course, the business owner should monitor family member performance in case they need to adjust the succession plan.
- Do set your family members up for success. Sometimes, family members may not be prepared for the position they are to fill in the business. Bringing inexperienced family members in too early can set them up for failure; it also may rankle non-family key employees and unsettle key third-party stakeholders, such as lenders, customers, and suppliers. Successful integration into the team gives family members opportunity to learn and move naturally through “the ranks” – helping them to establish themselves and their contributions. It also gives the business owner and management team a chance to observe and nurture their skills and capabilities. Moreover, it provides time for relationships to develop between the rising generation and third parties important to the success of the business.
- Don’t be quick to transfer ownership to the next generation. Family business owners may be tempted to transfer ownership as an incentive for family members to join the business. While well intentioned, these transfers may lead to unintended consequences, especially if the family member does not have the required skills or engagement. There are other ways to incentivize family members, such as appropriate compensation and leadership opportunities, and decisions regarding ownership and control can wait until the family member is ready and decides to remain for the long term.
Successful transition of your family business to the next generation takes thoughtful planning, and these dos and don’ts are just part of the process. To learn more about strategies to your family business, please reach out to your advisors at Wells Fargo Wealth & Investment Management for an introduction to one of our business owner advisory strategists.
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