Succession planning is a vital consideration for multigenerational families – not only to secure the financial future of their businesses, but also to ensure that values and traditions developed over time can be passed on from one generation to the next. The challenge of succession planning begins with the fact that no two family dynamics are exactly alike: each company’s transition process will have unique implications for all the parties involved. Recognizing this reality is key to finding ways to navigate succession challenges smoothly and successfully within a multigenerational family. In this article, we explore how best to manage expectations and plan for strong leadership transitions within a family business.
Tips on How to Manage Expectations
Succession challenges in multigenerational families are complex and something many families struggle to address properly. Transitioning between generations can require a great deal of work on behalf of all the family members involved, especially when it comes to the transfer of assets and the management of expectations. Families can unfortunately experience conflict when unmet expectations lead to friction and disappointment.
It is essential that families create a plan in advance of the transition that outlines goals and expectations so everyone involved has clarity regarding their role. Additionally, it’s possible to avoid problems when there is open communication between family members during the process with clear guidelines around decision making. By empowering family members and establishing an atmosphere of mutual respect, multigenerational businesses can succeed at managing the succession process with minimal disruption or disagreement.
How to Plan for Strong Leadership Transitions
Succession difficulties often arise when a family tries to navigate the transition of leadership between multiple generations. Many multigenerational families need strong leaders to help represent every family member and their interests. To best align each generation's vision and voice, it is important to consider succession planning as early as possible. This includes developing an understanding of the family interests, setting expectations for emerging leaders (should they possess certain qualifications prior to filling a management role?, for example), and creating clear lines of communication amongst those in positions of power.
Furthermore, establishing an ongoing family forum or council to discuss the direction of the company and other relevant topics can be helpful, as well as creating a shareholders’ agreement. This document might consider what the protocol will be for situations like electing a board, selling the business, giving to charities, and borrowing. Planning well in advance will help ensure the entire family makes informed decisions through a variety of perspectives that are unique to each generation.
Another consideration not to be overlooked is how the next generation will be paid, especially if they take on management roles. While the founding generation can initially handle this, how will this play out in the future? Moreover, what happens if the company’s profit starts to decline after the new generation takes over? How will the shareholders decide the new management’s compensation and dividends? And will a family member who decides not to work for the company still receive any dividends? There are many questions to deliberate.
How to Divide the Company Shares
One of the primary succession challenges to confront multigenerational families is determining how to divide shares among the next generation. Some companies decide on a more even split, whereas in other cases one heir may receive favored treatment. In yet other scenarios, multiple heirs might each control a certain percentage or only certain aspects of the business. Determining the value of the shares in advance can help avoid disputes later on.
The founding generation must also consider what will happen if someone wants to exit the business or transfer their shares to a third party. Moreover, can non-family such as spouses or adopted children own equity in the company? It can be tricky to maneuver all of these variables but is usually possible with careful attention and good communication between generations.
The Bottom Line
Overall, succession planning is no easy feat, but it is crucial if a multigenerational family wants to continue to experience wealth and success into the future. It takes time and dedication along with an awareness of potential challenges and pitfalls. If succession planning is approached thoughtfully and sincerely, however, a solid plan can be crafted that factors in each generation’s stake in the family enterprise. The reward of a unified, prosperous family business is definitely worth the effort it takes to establish continuity among its various generations.
Disclosure: Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.