Bringing family members into your business – dos and don’ts

Stephanie Duignan,
Advice and Planning Director,
Wells Fargo Wealth & Investment Management

Tracey Gillespie,
Business Owner Advisory Managing Director,
Wells Fargo Wealth & Investment Management

A recent Wells Fargo Wealth & Investment Management survey found that only a quarter of business owners want their children to inherit and run their business when they no longer can or want to continue running the business.¹ This finding highlights the fact that many business owners recognize that 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 can be other keys to its success. Continuity may require a carefully constructed plan of succession that takes into account family members, non-family key employees, and important third-party stakeholders.

For those who do want to keep their business in the family, there are a number of key things to consider when developing a family business succession plan.

• Consider having conversations and setting 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 can be a good way to manage expectations about job roles, leadership advancement, compensation, future ownership and control of the business, and business stewardship. Also, not all family members will want to join the family business; understanding this early will help to ensure you are aware of career aspirations across the family.
• Avoid neglecting 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 be able to see a bright future for themselves rather than a glass ceiling.
• Look at creating 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.
• Avoid managing 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 help mitigate the 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.
• Help 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 may give family members the opportunity to learn and move naturally through “the ranks” — helping them establish themselves and their contributions. It can also give the business owner and management team a chance to observe and nurture their skills and capabilities. Moreover, it can provide time for relationships to develop between the rising generation and third parties important to the success of the business.
• Take care before transferring 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 will likely take thoughtful planning, and considering these issues is just part of the process. To learn more about strategies for 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.

1. On behalf of Wells Fargo, Versta Research conducted a national survey of 1,008 Wealth Creators, defined as U.S. adults age 50 or over who have at least $1 million in investable assets, excluding those who inherited most of their assets. The sample included 136 from Generation X (ages 50 to 57), 771 Baby Boomers (ages 58 to 76), and 101 from the Silent Generation (ages 77 and older). Data were weighted by age to match current population estimates of U.S. households with $1M+ in investable assets, derived from the Federal Reserve Board’s Survey of Consumer Finances. The survey was conducted January 3 – 18, 2023. Assuming no sample bias, the maximum margin of error for full-sample estimates is ±3%.