A family business is technically defined as an organization that is owned and operated by at least two members of the same family. Family businesses actually account for around two-thirds of all companies worldwide, and 90% of companies in the U.S. The largest 500 family-owned companies generate annual revenues of $6.5 trillion. Global research has also demonstrated that well-run family companies are more profitable and stay in business longer than other companies, even with the many challenges they face. A succession plan is a strategy designed to pass the ownership and leadership roles down to another family member or current employee. As a business owner, having a succession plan in place is important for multiple reasons. First of all, a solid succession plan will keep you focused on your long-term vision for the business. And it makes sure that whoever is taking over is on the same page regarding your vision and goals for the future of the business. It also forces you to think about what areas of your business may need extra attention in order for your plans to succeed. Additionally, a succession plan protects your business in the event of an unexpected life-changing event.
It is worth mentioning that a succession plan is not the same as an exit plan. It’s part of an exit plan. Succession planning focuses on the interests of the company when the owner exits the business and another person takes over. Exit planning focuses on the broader interests of the business owner, and succession is only one aspect of the broader plan.
Key to the Economy
Family-owned businesses are important to the global economy. They make up nearly 20% of the companies in the Fortune Global 500. In the United States, there are 5.5 million family businesses, contributing around 60% of the U.S. gross domestic product (equaling $8.3 trillion), and employing 62% of the workforce. They are also responsible for 78% of all new jobs. Additionally, studies have shown that family businesses tend to be better employers and stewards of their communities than non-family businesses. Research has also shown that family businesses are less likely to lay off their staff, regardless of financial performance. These are all reasons why proper succession planning is so incredibly important for your family-owned business.
Yet, Succession is Still a Challenge
Unfortunately, it is common for the owners of family-owned businesses to have no succession plan or exit plan in place. It doesn’t matter if you do not plan to retire in the near future. The fact is that the future is unpredictable, so it is just prudent to have a documented succession strategy for the ultimate fate of your business. It is just smart business to be prepared for any scenario (or opportunity) that comes along.
The average life span of a family-owned company is 24 years. Around 40% of U.S. family-owned businesses transition to the second generation, and around 13% transition to a third generation, with only 3% making it to a fourth generation.
Almost a third of family business owners have no plans to ever retire, and nearly a third say that retirement is more than 11 years away. Without a succession plan, it poses a real challenge for the next generation. Studies show that almost half of all family business collapses are caused by the owner’s death, and while 70% of owners want to pass the business onto the next generation, only 30% are successful at the transition. These are signs of zero or poor succession planning.
Getting it Right
Succession planning has been proven to be a major challenge for family-owned businesses. And there are several factors that can make family-owned companies more challenging to manage. You have to account for issues such as family dynamics, trust issues, proper communication, the course of younger generations, and varying expectations for family members versus other employees. But most of these issues can be solved or eliminated by proper succession planning. The smartest thing you can do is to enlist the help of professional succession planning experts to help you craft the right plan for your company. The value provided by such a service can be almost immeasurable.
Say you have been expecting one of your employees to buy out your company. If this is the case, you need to ensure that they have the financial capacity to pay you what the business is worth, as well as the skills to sustain its success. If the business struggles while you wait for your payout, you could face serious financial risk. You have to take proper steps to make sure the company is in the right hands moving forward.
It is also important that you don’t make assumptions as part of your succession plan. Talk it over with your family members to make sure they are even interested in taking over the company. And, if they are interested, do they have the knowledge, qualities, and leadership skills required to run the business effectively? By starting to plan your succession now, you will have more time to help them be prepared to take over.
But what if you do not have a qualified person to take over? You may need to create a broader exit plan that involves a third party purchasing the company.
Contact us at Benchmark International to begin your succession or exit planning process. We have the experience and can help you plan your future as you see it, so your dreams can become reality.
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL
Benchmark International is a global M&A firm that provides business owners with creative, value-maximizing solutions for growing and exiting their businesses. Benchmark International has handled over $8.25 billion in transaction value across various industries from offices across the world. With decades of M&A experience, Benchmark International’s transaction teams have assisted business owners with achieving their objectives and ensuring the continued growth of their businesses. The firm has also been named the Investment Banking Firm of the Year by The M&A Advisor and the #1 Sell-side, Privately Owned M&A Advisor in the World by Pitchbook’s Global League Tables.