Why are people so fascinated by family dynasties? Because the transfer of legacies from one generation to the next, whether it's a success or failure, gives us all a front row seat to a series of important life lessons.
One reason family dynasties are of such interest to us is that they're so tough to achieve. While 88% of family business owners believe the same family or families will control their business in the future, only about 30% make it into the second generation—and fewer than 5% make it to the fourth. Those are not impressive odds so what makes for a successful transition to future generations and what thwarts that ability? Business owners face several obstacles when seeking to ensure that their business legacy continues with and through their children. Here are some common challenges to consider.
Conflict. Very few—fewer than 25%—of family businesses have done any succession planning. This fuels the potential for disharmony. One of the big reasons not to have a formal succession plan is that it'll cause family conflicts. There are tough decisions to be made—and it's often seems easier to avoid them.
Income. Revenue distribution and work compensation is a potential minefield. When you bring in someone from the next generation to the company, some folks try to combine that person's compensation with their anticipated inheritance. That's no good because it will provide more compensation than is right for the position, creating a family member's inflated sense of worth to the business and angry employees.
Interest and Involvement. An owner with several children may have some offspring who are just not interested in being a part of the family business. Nonetheless, they'll all expect an equal share, which might frustrate those siblings who worked years to make the business successful.
Technology. An owner may be reluctant to accept changes in methods and procedures, resisting new technology they don't understand. But the technological advances that a young generation brings can translate into efficiency and improved profit margins. It's a balance.
Uncertainty. Some business owners postpone succession planning because they think they'll be around for many more years. But illness and death can occur suddenly. With that in mind, the most successful succession plans are typically those that are in place the longest.
Regulation and Taxes. When a business is transferred to a new generation, there can be serious tax consequences. This needs to be part of the plan, especially as an onerous tax burden could force heirs to sell all or part of the business to raise capital to pay the tax bill. That's why business owners need up-to-date estate plans that leverage tax regulations on wealth transfer and gifting.
The most important part of any business ownership transition is to create a strategy well in advance. Review that plan periodically to be sure everything is on track. Regular communication can help avoid any surprises and confusion. Creating a well-thought-out plan gives your business the greatest opportunity to make a successful generational transition.
Reference: Yakima Herald (May 20, 2016) "Passing the baton: 6 challenges for family business succession"