When it’s NOT All in the Family: Succession Planning for Family Businesses

Your son John has the best sales record on the team. Your daughter Mary’s advertising campaign was a huge success. But despite their talents and success, neither has a head for numbers. And neither has much savvy when it comes to culture and management. Kevin, your right-hand man for the last 15 years, runs operations smoothly, managing both finances and people with ease. He’s the obvious leader. But he’s not family. And he’s not an owner. As you begin to plan for your retirement, how do you do what’s best for your family without risking losing Kevin? Focusing on the company as an entity rather than the people as individuals allows you to set emotion aside and gain the perspective you need.

Succession planning for family businesses is essential.

Leaders will not always agree on the best decisions. Rather than arguing and creating unnecessary drama, the team can simply refer to the plan, finding the structure and direction to guide them to the correct decisions. Succession planning for family businesses allows you to make necessary changes within the family structure for the business without being interpreted as an individual slap or reprimand.

Including key nonfamily employees helps your family and your company.

This is your business. And your family. You’ve poured your blood, sweat and tears into this company. And now you want to see your children benefit from all that hard work. You recognize that the best way for your children to succeed is by ensuring that Kevin stays with the company after you leave. Without Kevin’s leadership, John and Mary will struggle to run the company on their own. Your succession plan must find ways to keep Kevin involved, motivated and loyal.

  • John and Mary will have an emotional attachment that can cloud judgment. As an outsider, Kevin has a more objectivity. His fresh perspective is unique from family members, and he can see issues and opportunities those raised in the business may miss.
  • John and Mary are lacking in some of the experience and talents necessary to run the company. As the company grows, Kevin’s leadership skills, experience and objectivity will become even more important.
  • Because of Kevin’s direct impact on the success of the business, his loyalty and longevity will likely factor in to the value of the business. Noncompete and other employment contracts are essential.

Succession plan options that help retain nonfamily key employees.

A succession plan, especially one that endeavors to involve both family and key non-family employees, must be customized to your unique business needs and objectives. Every business, every family and every ownership structure is different. Various options are available, but what’s best for your company may be completely different from what’s best for your peers.

A few options to consider include:

  • Minority ownership interest. This option gives a key nonfamily employee a vested interest and a measure of control over the direction of the company. However, if your most important employee is your nonfamily member with minority interest, minority ownership may not give him the influence and power necessary to run the business in the most profitable way.
  • A family employment policy. This type of policy assures nonfamily members that family members will not receive undue financial reward or promotion just for being part of the family. This increases their trust and their motivation to continue to work hard toward success.
  • Phantom stock plan. Phantom stockowners are entitled to distributions and interest in profits and losses as well as a percentage of the sale price. However, they are not involved in overall or discretionary management.
  • Bonus arrangements tied to performance and focus.

Always communicate.

Simply including key nonfamily employees in your succession plan is not enough. They are more likely to be loyal and motivated to work hard if their value to the company and their future with the company are clearly defined and communicated.

  • A good place to start is a conversation between parents and children about the business, aligning the children’s and parents’ goals and aspirations with respect to the business. Once the objectives are laid out, the dialogue should be expanded to other key players with the appropriate safeguards.
  • Clear communication of their inclusion in the future of the company reduces suspicion that family members will be favored for promotions, leadership, ownership and financial reward.
  • As your retirement approaches, nonfamily employees will likely question how their career will be impacted by the next generation of family leaders. Communication regarding your succession plan diminishes the risk that these key nonfamily employees will start searching for new opportunities as you near retirement.
  • Transparency about succession plans reduces conflict arising from misinformation and assumptions. By sharing your plan, you curtail resentment, unanswered questions and jockeying for position.
  • Awareness of goals and personal investment and pay-off motivates employees to work harder. Rather than wondering why they are working hard when they are not sure when or if they will ever own the business, they are motivated by seeing when and how their hard work will pay off.

Thinking back to your situation with John, Mary and Kevin, how will you keep Kevin loyal to your company as you approach retirement? Will you offer him phantom stock? Assure him with a family employment policy that reduces the risk that he’ll be overlooked just because he’s not a member of the family? Should he have any ownership interest? Or does he need more control to drive the company toward success? Your best bet is to involve your trusted advisors in your succession planning process. With a full understanding of your company’s operations, risks and family dynamics, you and your planning team can create a succession plan that keeps Kevin loyal to the company and helps John and Mary achieve the success you’ve always wanted for them, and for your company.

Succession planning for family businesses is vital. If you’re looking for help with your succession plan, please contact Cray Kaiser today.