When the time comes to pass the torch to the next generation, many families mistakenly equate succession planning with merely transferring ownership. This narrow focus can lead to unresolved conflicts, destabilized businesses, and fractured family relationships.
In reality, successful family business succession involves much more than tax strategies and legal agreements; it requires a holistic understanding of the intricate dynamics at play within the family business ecosystem.
Mistaking Ownership Transfer for Succession Planning
When it comes to business succession, most advisors tend to focus intently on the technical aspects such as tax minimization strategies, buy-sell agreements, prenuptial agreements, shareholders’ agreements, family partnerships, LLCs, and gifts or sales to irrevocable grantor trusts.
This approach leads many families to believe that succession planning merely involves transferring ownership of family business stock, partnerships, or member interests to the next generation through complex tax-saving strategies. In truth, this couldn’t be further from reality.
In reality, transferring ownership of assets is merely one facet of the comprehensive business succession process. Concentrating solely on this aspect neglects the profound influence of the family, which affects not only the owners but also the employees managing the business.
Additionally, succession plans significantly impact the next generation of family members. Even though they may not yet own or work in the business, they have a vested interest from the start due to their lineage.
The Three-Circle Model in Family Business
The Three-Circle Model of the Family Business System, developed at Harvard Business School by Renato Tagiuri and John Davis in 1978, is frequently cited to illustrate the primary systems of influence within a family business. Understanding this foundational concept is crucial for effective family business succession planning.
The model identifies three distinct yet interdependent systems within every family business, which overlap to form seven specific stakeholder groups, each with unique needs and interests:
1. Family
2. Family-employee
3. Family-owner-employee
4. Non-family owner
5. Non-family owner-employee
6. Non-family employee
Recognizing that these three concurrent systems influence a family business underscores the importance of giving equal attention to all three. Neglecting any one system can hinder long-term success in succession planning.
Taking on the Family in Family Business
What sets a family business apart from other businesses is just that – family. The family dynamic introduces an additional layer of complexity when it comes to succession planning, as generational wealth inherently involves multiple family members, each with their own vested interests.
To combat these challenges, it is crucial to establish and adhere to family business policies that address the inevitable complexities that family dynamics bring.
Consider the following questions:
1. What is the collective desire of family members regarding the creation of a lasting business legacy for future generations?
2. Is ownership determined solely by family lineage, or is active participation in the business also required? What can owners expect in terms of distributions, if any?
3. As the family expands over generations, it is inevitable that some members may wish to exit the business – what constitutes a fair exit strategy for all parties involved?
4. What qualifications and requirements must family members meet to have the opportunity to participate and/or work in the family business, if at all?
5. Do next-generation family members aspire to be active in the family business? What metrics will be used to identify future leaders?
Owners and Management Issues
Establishing clear guidelines for family business succession is crucial. Advancing a succession plan involves understanding and navigating the inevitable challenges within both the ownership and management structures.
Here are a few key considerations for each system:
All for One and One for All
In light of the Three-Circle Model, the best approach to family business succession involves a multi-faceted strategy to address concerns across all three systems. While some activities may target specific systems, integrating all three throughout the process strengthens the succession plan.
For instance, if Owners are developing policies for board membership or distributions, soliciting feedback from Management and incorporating the Family’s long-term vision, mission, and values helps create policies that all stakeholders can support. Distributing a survey to senior management and key employees is one way to gather necessary information, while ongoing formal meetings between the Owners Council and the Family Council ensure continuous alignment.
These examples illustrate how interweaving activities across all three systems benefits the overall planning process.
Wrapping it Up
Successful family business succession involves more than just legal and financial preparations. Long-term success requires a deep understanding of the interplay between family dynamics, ownership structures, and business operations, recognizing the primary needs and interests of each stakeholder group.
By adopting a holistic approach that integrates these elements, family businesses can develop succession plans that preserve wealth, strengthen family unity, and ensure long-term business viability.