Common Challenges with Family Business Succession Planning

POST DATE: 8.21.23
Ccha  Estate Planning

Common Challenges with Family Business Succession Planning

Family business succession planning involves transitioning leadership and ownership of a family-owned business from generation to generation. For some families, the transition between successor and predecessor goes smoothly. In other situations, founders need help to keep the next generation of their family focused on their same business goals. In fact, nearly a quarter of family business owners surveyed think their successors are unqualified or unwilling to take over their company.

Succession planning is essential to ensure the business’s long-term viability, and families often face several common challenges during this process. In this post, the Church Church Hittle and Antrim team will also explain some of the biggest challenges for family businesses in transition. We will also provide some best practices to give you a head start in managing your succession plan.

Overcoming Emotional and Social Challenges in a Family Business Transition

One of the biggest challenges family businesses in transition face is overcoming the emotional issues brewing within the family, outside of the business. Emotional attachments to the company, sibling rivalries, and differing opinions on leadership roles can complicate decision-making. Below are some ways those emotional and social dynamics can impact a succession plan.

Lack of Communication Between Generations

Effective communication is critical, but discussing retirement, ownership shares, and leadership roles can be sensitive and difficult to address openly within the family. For founders, it can be hard to consider their mortality. No one wants to discuss how their family and business will continue without them.

These discussions can bring up emotions concerning life, death, and control. Having an attorney help your family-run business create a transition plan can take the emotional heat out of the room and help founders discuss what comes next without feeling left out of the conversation.

Founders may also be aware that while more than 80% of the world’s businesses are family-run, less than 15% are handed down past the second generation. Instead of confronting realities like this head-on, some founders may prefer to let the next generation sort it out.

Image of multi generation family at apple orchard

Lack of Clarity in Successor Selection

Another challenge family businesses face is choosing the right person to succeed the founder. Family members may have differing interests, capabilities, or commitment levels when it comes to the business. Striking a balance between family needs and the business’s best interests is essential for maintaining the company’s success and avoiding conflicts.

Lack of any Successor Planning

Family businesses can benefit from having a well-executed succession plan in place. This could be in the form of a Will, Trust, or buy-sell agreement. Having a plan in place can take the burden off future generations and allow for structured decision making.

Operational Challenges in Family Business Succession Planning

When succession planning, families face challenges that are both emotional and operational. How will the successor get the proper training? Who will provide the tools for them to succeed? Some of the most common operational challenges families face in family business succession planning include the following:

  • Training and preparing the successor to lead;

  • Managing tax and estate issues to maximize the benefit to both the business and the retiring founder or their estate;

  • Allocating appropriate financial resources for both active and non-active family members;

  • Confronting resistance from both family members and employees to change operations within the organization; and

  • Creating effective legal and governance structures, such as family councils or boards.

Founders and successors should be mindful of the financial responsibilities of a family business transition. Mismanaged tax issues or failure to account for a distribution to a retired or inactive family member can be costly if not properly planned for.

Image of a son and dad at work

Best Practices for a Smooth Family Business Transition

Addressing the challenges of transitioning a family business to the next generation requires effort and time. You must plan carefully and use any tools your lawyer believes would be beneficial in helping your family transition smoothly.

These tools are essential to consider when thinking about how to structure or manage your business going forward. For instance, many family businesses are structured as sole proprietorships, where there is little separation between the owner and the company. When there is no way to distinguish between the founder and the business, succession planning can become considerably more complicated. By considering long-term solutions, like incorporating your business or forming a limited partnership or limited liability company, you can create a smoother path and clear instructions for passing down your company.

Finally, you should consider the possibility of incapacity, disability, divorce, or simply deciding to end your involvement in the company when making a succession plan. By considering a variety of succession scenarios and planning for the long term, you may be able to enjoy your retirement while happily observing your successors take over.

How CCHA Law Can Help

At CCHA Law, our team of business and estate lawyers has helped Indiana family businesses succeed for over 140 years. To schedule a consultation with an estate planning lawyer, call 317-773-2190 today. You can also connect with us through our online contact form.