Family businesses often carry a lot of behind-the-scenes baggage that can weigh on efforts to develop a smooth succession plan, but there are routes to success. Finding that path is vital if a family-owned enterprise is going to thrive into the next generation.
Four out of five U.S. family business owners are not succession-ready, according to the latest research by Baker Tilly International, a global network of independent accounting and business advisory firms.
Key challenges faced by family business owners include being ready for transition or market sale and ensuring that the business has the financial capacity to support both retirement and the next generation, according to its recently released study, Succession Reset: Family Business Succession in the 21st Century [pdf].
“We’re in a new era of succession. The notion that the eldest child is going to take over the business when the parent is ready to retire is not a viable option for the continuity of family-owned businesses,” says Carl Johnson, Chairman of the North American Regional Advisory Council of Baker Tilly International.
“Succession today is just as much about the transfer of knowledge and skills as it is about the transfer of wealth. This is because the level of skills required to effectively run a business in today’s environment is far greater than it was in previous generations. If business owners haven’t helped the next generation develop these skills, the capital value of the business is going to be impacted. If a skills gap causes a vacancy in leadership, then it’s going be hard to maintain the desired business continuity.”
The findings are based on research conducted over the last four years, including in-depth interviews with 77 people across 49 families and the analysis of survey responses by 2,650 people in 56 countries.
The study noted that approximately 73 percent of those surveyed do not see a compelling rationale to pass their business to a family member and would consider a sale of business.
A generational shift is occurring that has not been experienced before as baby boomers exit management and control. “The size of the family-business sector means that if this transition is not managed well, the impact on global economies will be significant,” the report concludes.
“Succession planning at retirement is too late. The process needs to be a component of an overall business strategy,” Johnson says.
Continuity of the business, family harmony and sustaining ongoing jobs for employees are key outcomes sought in the succession process, according to the study. However, U.S. respondents ranked the maintenance of family harmony as less important than the rest of the world. A higher rate of U.S. survey participants reported substantial conflict during the succession process, in contrast to the rest of the world.
“The hardest part of any succession process is family harmony but it doesn’t have to be,” comments Johnson. “Creating a governance structure can make the journey of succession easier.
In the rest of the world spouses were considered the most important advisors in reducing conflict related to succession planning as opposed to in the U.S., where respondents focus on the importance of using consultants, accountants and attorneys to help move the process forward. However, the results of the survey suggest U.S. family owned businesses lag the rest of the world in the use of governance for succession planning.
Some of the more interesting differences between respondents in the U.S. versus other countries:
The survey revealed that the No. 1 trigger for the start of succession process in the U.S. was advice from external sources including estate planning and tax advisors, while a “readiness to step down” was cited as the key trigger for the rest of the world.
When it came to outcomes sought from the succession process, for those who had completed their plans, the U.S. was out of step with the rest of the world. In the U.S. the number one outcome was the “creation of formal documentation” whereas the rest of the world was focused on “equitable inheritance for all family members.” Also interesting was “finding the right person for the job,” which the rest of the world ranked as number two and the U.S. ranked number five.
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Michele has been a director with Financial Poise since 2012.
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