Challenges Faced by Family Businesses and Closely Held Enterprises in Transitioning Ownership and Management to the Next Generation

Owners of family-founded and family-run businesses in Arizona face a variety of challenges while building and growing their business. Remaining competitive, staying ahead of market trends, and constantly adapting to the changing demands of consumers can keep business owners busy. The day-to-day demands on an owner’s time may cause succession planning to take a back seat to more pressing priorities.

Although it may not seem like an urgent task to deal with right away, beginning to think about succession planning years in advance can contribute to a much smoother transition when it is time to pass the torch. Taking steps to avoid some of the common challenges can enhance your peace of mind today and make retiring a more enjoyable and far less contentious proposition.

Formalizing Succession Planning

Family businesses often lack a formalized and detailed succession plan. It’s simply not top of mind for many entrepreneurs in the initial years of operating their business. Most small businesses fail within five to 10 years, and transitioning operations to a successor isn’t typically a pressing concern for founders until the business is durable, sustainable and possesses growth potential.

However, it’s not uncommon for successful small business founders to get so caught up in growing their thriving business that they don’t think much about passing their business on.

Many small business owners who are nearing or past 65 years of age are reluctant to step down, especially if there’s no clear successor. Settling on successors and beginning to coach and prepare the future owners and managers early can lead to a more successful transition.

Family Disputes

Familial relationships can complicate the transition process if the founder and current owner has not established a transparent succession plan. Differing opinions within the family, sibling rivalries, disagreements over roles, and conflicts regarding business direction can create tension that spills over into personal lives. These disputes can make the successful transition of a family business particularly difficult.

Preparing the Next Generation

Many founders take pride in passing their business on to their children or grandchildren. Keeping the business in their family may even be part of their retirement plan. It can be difficult to pass a business on to other family members if they don’t possess the necessary skills or experience to take over and smoothly continue operations.

Gaps in leadership development, training or mentorship can hinder transitions. This can also create disunity within the business, especially if long-time and experienced employees are passed over for family members with little experience or proven ability to run the business.

Ownership vs. Management

Clearly differentiating between ownership and management roles can be particularly important, especially in situations where long-time employees are more suited to manage than family members. Some family members may benefit more from ownership without being involved in daily operations, while others may prefer (or feel entitled to) leadership roles within the business.

Deciding on roles in advance and holding to plans can be vital for owners during the transition. Transparency and clear expectations can potentially decrease animosity if some interested parties are disappointed with the outcome.

Balancing Family and Non-Family Employees

Many small businesses have key non-family employees who possess institutional knowledge, unique skills, and sometimes many years or even decades of experience in management. The business’s increased valuation and continued success may be due in large part to these non-family employees, and the continued success of the business may be dependent on them.

Family business owners need to carefully balance their succession plans to ensure key employees aren’t lost due to bitterness or disappointment with decisions. It’s also possible for family members who are given ownership or management roles to face resentment or have difficulty managing employees who feel passed over.

Disagreements Over Valuation

Assigning value to a business can be difficult and lead to disputes among family members who want to sell their share or exit the business. Accurate and clear accounting and forecasting can help ensure every interested party is on the same page regarding valuation.

Preserving the Founder’s Legacy

Founders often have strong emotional ties to the business they founded and built. They may be hesitant to retire or pass the business they built onto their family members if they are concerned their legacy won’t be respected and preserved. Alternatively, they may be reticent about the new generation making significant changes or adopting a different approach to operations.

Addressing the Challenges of Succession Planning

There aren’t always easy or straightforward solutions for some of the common challenges facing business owners during succession planning. Owners who clearly communicate with stakeholders, listen to concerns, and clearly explain their preferences and reasoning may experience more dependable succession outcomes.

Consulting with external advisors, including financial planners, tax professionals and attorneys, may increase the likelihood of a smooth and successful transition. Business owners in Phoenix who are seeking guidance on retirement and succession planning can schedule a free consultation with the team at Fullerton Financial Planning by calling (623) 974-0300.