SAVING THE FAMILY BUSINESS
Tips for when a business owner decides to exit Succession
We need to help the organizations we work with think of
succession as a process, not an event … .
By Randy Boss, CRM, MWCA, SHRM-SCP
Someday a business owner will exit their business, whether they are ready for it or not. As risk advisors, we can make them aware of the problems that may ensue and help them prepare for a smooth transition, not only to save the family business, but also to protect them if premature death or disability occurs while they are making that decision.
According to the Family Business Consulting Group, succession is the most painful and critical time for family businesses. Data show that fewer than one-third of family businesses survive into the second generation, and only about 13% make it into the third. That’s a sobering statistic, and since family business is such an integral part of the U.S. economy, it’s essential to know why some family businesses succeed and others fail.
During my 40-year career as an insurance advisor, I have seen plenty of change. One of my current clients is the fourth generation, and I knew his great-grandfather. He is already planning what will become of his business when he exits. I also had a client that had no succession plan and simply liquidated his business when he retired, thus letting all the goodwill he had built with his customers evaporate overnight.
We need to help the organizations we work with think of succession as a process, not an event, while keeping in mind that not everyone has until they are in their 70s or 80s to have it completed; because an accident or act of nature can take them out in their 30s and 40s. Without a plan, the value of the business will be decimated, and the financial security they were planning for their spouse and family is gone.
As trusted advisors, we can’t just bring it up once and be done; we need to make it a regular review checklist item with a sense of urgency. We owe it to them and their family to do this, by explaining the importance of life and disability protection while working through the planning process.
Business continuity is defined as a business’s ability to continue core business function operations that are not seriously impacted by a disaster or unplanned incident. Part of this includes exit planning. This is a process that involves planning how a business will go on after the owner’s retirement or death. The goal of an exit plan is to allow a business to survive without the founder’s direct involvement.
There are only four ways for a business owner to exit their business:
- Transition to a child/children
- Sale to employees
- Sale to a third party
Regardless of which option is chosen, planning while there is still time is critical. According to Pricewaterhouse Coopers, 85% of business owners have not planned their exit strategy, and 65% had no idea what their business was worth, even though 75% of their net worth was tied up in their business. The failure to plan for an owner’s transition may be the greatest threat to their family business.
Findings attributed to the University of Connecticut Family Business Program indicate that nearly half (47.7%) of all family-operated business collapses are due to the founder’s death, or in 29.8% of the cases, an unexpected death. Only in a few instances (16.4%) did the business failure follow an orderly transition, and that figure drops to 6.1% when the owner was forced to retire.
Here are a few tips every family business should consider in order to accomplish a smooth transition to the next generation:
- Educate on the importance of responsible financial management and wealth as early as possible.
- Cultivate a family culture around shared values in your family’s history.
- Protect the business’s future ownership structures by instituting formal governance that will separate family control from the daily management of the company.
- Professionalize the business by establishing employment standards for both family and non-family employees.
- Begin planning now for the eventual succession of your business.
If the family option isn’t chosen and the business is instead sold to employees or a third party, the business’s value is many times more because a planned transition often leads to a fire sale or forced liquidation.
Perpetuating a family business can be the ultimate management challenge. As advisors working with many family businesses, you can get them thinking about what they can do to “save” their family business. They will thank you for it.
Randy Boss is a Certified Risk Manager at Ottawa Kent in Jenison, Michigan. As a Risk Manager, he designs, builds and implements risk management and insurance plans for middle market companies in the areas of safety, work comp, human resources, property/casualty and benefits. He has over 40 years’ experience and has been at Ottawa Kent for 40 years. He is the co-founder of emergeapps.com, web apps for insurance agents to share with employers. Randy can be reached at firstname.lastname@example.org.