Family business succession planning is a mechanism by which control over a significant family asset – often a company, a collection of artwork, or a real estate portfolio – is maintained, without placing the growth and development of either the family or the asset at risk. Succession planning is a process that maximizes opportunities and facilitates the creation of a multi-generational institution that embodies the founder or current leader’s mission and values long after he or she is gone.

With only 30% of family businesses surviving into the second generation and just 12% into the third, statistics on family businesses surviving multiple generations are grim. Research indicates the most prevalent cause for the failure of a family business is a lack of succession planning.

Given proper thought and attention, failure of this nature is avoidable.

While succession planning for family enterprises and closely held businesses always has its unique challenges, it is a process to which family leaders must fully commit to. The consequences for not doing so often include family heirs losing control over assets critical to the identity of the family enterprise. Compounding the issue is the fact that this loss of control usually occurs along with a significant loss of both capital and opportunity.

Succession planning to maintain family ownership and control 

Most owners of family businesses who desire to maintain ownership and control of their assets over time face linked challenges; creating strong business performance and creating strong family commitments. To achieve both, these three things must first exist:

• You must have access to people – either inside or outside of your family – who possess the expertise and experience necessary to manage your business.

• You must be able to place your trust in those people.

• Keeping ownership control must be financially feasible.

Erskine & Erskine has developed a model that involves a comprehensive review and analysis of the family enterprise, including making provisions for three exhaustive – but not mutually exclusive – direct causes that may prevent a previously intended succession from occurring:

• All potential family successors decline management/leadership of the business.

• The dominant coalition rejects all potential family successors.

• The dominant coalition decides against family succession although acceptable and willing potential family successors exist.

This review and analysis also identifies five exhaustive – but not independent – categories of factors antecedent to, and having an impact on, the three direct causes:  Individual personalities may facilitate – or strain – the process. Relationships within the overall group dynamic are bound to do the same. Financial factors are universal, and the process itself may ruffle the feathers of some. Finally, the larger context in which any of this plays out is sure to be a significant factor.

The best anyone could expect from a well-designed, functional succession plan is the literal execution of the plan itself. Transitions go much more smoothly – and stay on track more reliably – when family and business leadership collectively know where the enterprise is headed well in advance of any events triggering execution of a succession.

A good succession plan will facilitate Jim Collin’s flywheel effect, as documented in his book Good to Great. The family – and the family enterprise – will know exactly what you wanted, what you wanted to achieve, and who can best help the family enterprise reach those objectives. This can only be done with the confidence gained in having successors know your plan and understanding your level of commitment to making it reality.

There will be secondary results as well, each with an immediate impact on improving the value of your business, not to mention your peace of mind. Developing your succession plan will have compelled you to identify – and deal with – any emotional issues present within the family dynamic, providing opportunity to resolve issues that may have a bigger, more immediate, and longer lasting impact on the family than the financial outcome of the plan itself.

Family Business Terms:

Beneficiary-Owned S Corporation Trust Buy-Sell Agreement Closely Held Corporation Estate Freeze Family Corporation Family Partnership Grantor S Corporation Trust Hybrid Buy-Sell Agreement Qualified Subchapter S Trust S Corporation Three-Party Gift/Leaseback Two-Party Gift/Leaseback