As the baby boomers continue marching to retirement, a significant number of entrepreneurs will soon begin transitioning family businesses to the next generation. If you are about to embark on this journey – in which two-thirds of all transitions fail – here are some potential pitfalls to avoid.
A recent study concluded that about half of family-business owners intend to pass the company on to the next generation. Other experts found that only about one in three companies successfully execute an inter-generational business transition. The leading causes of failure:
- Breakdown of communication and trust within the family unit: 60%
- Inadequately prepared heirs: 25%
- Absence of a clear vision or mission to align family members: 12%
- Advisors improperly addressing taxation, governance and wealth preservation: less than 3%
Pathways to success. With success riding largely on a family’s ability to communicate and to clearly articulate a plan for the future, the following guidelines may help ease the business transition.
Start planning early. Get the process going years before the actual transition. Some experts recommend building an exit or transition strategy into your initial business plan.
As part of the planning, consider creating :
- Supporting structures, such as a family constitution and business bylaws to familiarize all parties with the rules of governance. Fewer surprises mean fewer conflicts and discord down the road.
- A clear business vision that involves all family members regardless of whether a given member is active in running the business. Visioning – collectively detailing a successful future version of the company – is an effective method of allowing all stakeholders to share personal goals for the business, which in turn helps create buy-in and minimizes future conflicts.
Prepare the next generation. Identify the skills and leadership qualities that your business may need in the future. Then prepare young members of your family to fill those roles. This will likely require that you share knowledge and provide educational opportunities.
Manage conflicting priorities. Younger and older generations commonly have differing – and conflicting – priorities for the business.
- Senior leaders may express concern about whether the younger generation has what it takes to run the business; anxiety about their own next chapter of life, such as retirement or staying involved with the business in some capacity; or worries about all children, including those not involved in the business, receiving a fair share of the family wealth.
- Members of the younger generation may be anxious about making their mark on the business and taking the company in a new direction; investing in new technologies or processes that may improve the business but require a significant capital outlay; or micromanaging from an older owner who remains involved in day-to-day operations.
Families need to voice concerns openly; engaging a professional facilitator may help. When all parties around a family enterprise feel heard and respected, the sense of commitment to the business – and the transition process – grows stronger.
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Stephen P. Giulietti, CFP, CIMA, is Senior Vice President - Wealth Management at Morgan Stanley Wealth Management in Boston. Contact him at stephen.p.giulietti@morganstanley.com.
The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.
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