Succession in the Family Business

Posted: February 22, 1999 by Chuck Matthews in Operations, People, Planning

Classic Cincinnati Post column from 1999

When it comes to your accumulated life possessions, the title of 1930’s Pulitzer Prize-winning play by Moss Hart and George S. Kaufman captures the ultimate outcome of our physical assets – “You Can’t Take it With You.”  While the same is true if you own a family business, if you don’t plan ahead, there is a good chance you might not to leave it behind either – at least to the person or persons of your choosing.

Family owned businesses are the backbone of the U.S. economy.  A survey I conducted of 130 midwestern firms suggests that 80 to 90 percent of all firms are family owned. More impressively, family firms are estimated to contribute between 50 and 60 percent of the GDP, employ over 35 million people, and comprise nearly one-third of the Fortune 500.

Research suggests that only about three out of ten family firms survive into the next generation.  On average, the life expectancy has been estimated to be about 24 years – or about the average tenure of the founders.

Actually, this shouldn’t come as too much of a shock.  When I asked the sample of family business owners if they had prepared a management or an ownership succession plan, 42 percent said they had neither.  Only about 20 percent had either a formal written management or ownership succession plan.  Interestingly, while nearly 80 percent of family business owners intend to pass the business on to their children, these intentions are rarely supported by a formal plan.

What can you do to ensure the continuance of your family business and provide for smooth succession?

First, talk about it.  The number one obstacle to getting the process started is an alarming reluctance to talk about, let alone admit to, the inevitable – our own mortality.  To make a succession plan is to admit that we are going to die.  Once we admit that we are mortal, we can begin to manage the process instead letting it manage us.

Second, never assume.  If you don’t talk about the succession process, you run the danger of assuming things that could jeopardize the future of the firm.  Never assume that children will automatically be interested in taking over the family business or that they are not.  This can be a highly charged emotional issue.  Keep in mind that both the business and family systems each have unique issues, concerns, and needs that require attention.

For example, the younger generation will often have a different view of how to operate the business than the founder.  The founder often sees the business he or she has built as the nest egg or retirement fund, while the younger generation views the business in much the same the founder did 24 years earlier – a challenge, willing to take risks, an opportunity for growth.

Third, start planning early and update as you go.  At a minimum, you need to have a will.  Whether you are 21 or 81, a will directs how you want your belongings to go to your heirs.  If you don’t have one, the state will decide it for you and it may not be what you (or your heirs) had in mind.

As your business grows and prospers, you will need to develop more sophisticated planning.  At some point, you may need to involve professional assistance to help with changes in the law.  For example, the Qualified Family Owned Business Interest exclusion in the 1997 Taxpayer Relief Act will decline over the next seven years, while the Applicable Exclusion Amount (formally known as the Unified Credit Amount) will go up.  The rules are complex and you will need some qualified help to work your way through it, but it is generally worth it.

Founding, nurturing, and growing a family business can be a very rewarding life’s work.  While there will always be the potential for contention when money is involved, setting up a viable management and ownership succession plan can go a long way to easing that friction.

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