My rising high school senior had the best intentions for the summer of 2021. After a challenging junior year, he was looking forward to a break from academics and the demanding schedule of school athletics. He planned to spend time with friends, have fun at the pool, and relax on family vacations. Less desirable responsibilities such as a summer job, SAT preparation, and summer reading would be worked into his “busy” summer schedule when time permitted.
Overall, he accomplished most of what he wanted and needed to do. However, his dreaded summer reading still loomed at the end of July. Assigned classics like A Tale of Two Cities and The Grapes of Wrath did not appeal to his 17-year-old brain, and he found himself stressed with only a few weeks left before school resumed. With a little help from his mom and me, he created an accelerated reading plan. He then worked diligently—although not always joyfully—to complete the assigned books with only a few hours to spare before his first day of class. Fortunately, the price of his procrastination was rather inconsequential: a couple of weeks of long days spent reading rather than hanging out with his buddies.
Of course, it is human nature to delay undesirable or difficult tasks until there is an urgent need to address the matter, even for items of high importance. In over twenty years of working with business owners, I have consistently observed this behavior when addressing the succession plans for family-owned companies. In its 10th Family Business Survey, PWC found that “only one-third of North American family business leaders say they have a robust, documented, and communicated succession plan in place.” If you are an owner of a family business, this statistic is likely not surprising. You can probably relate to some of the reasons I have heard from clients in the past:
- “There is just too much going on right now with my business. Can we talk about this when things settle down?”
- “I need to wait until the economy improves and my business is in a better position before I can think about succession plans.”
- “My kids are too young to think about the transition plan for the company. Let’s revisit this conversation at a later time.”
- “Succession planning is just too complicated. Besides, I have no plans to retire anytime soon, and I am not sure what I would do if I were not running the business.”
- “We have a succession plan in place. Our attorney drafted a buy/sell agreement for our family business years ago.”
The validity of each of the above reasons does not diminish the importance of a well-conceived succession plan for a family business. Too much time, energy, and resources have been invested into your family-owned enterprise to ignore the risks of failing to plan appropriately. Getting ahead of leadership and ownership changes can significantly improve the odds that your business will continue to thrive, and the family wealth you have worked so hard to create will be preserved.
We understand that the process of developing, documenting, and communicating a succession plan can be overwhelming. To help you get started, we have provided some best practices to guide you on the journey. The clarity brought by undertaking this vital process will help bring peace of mind to you and your family.
Build a Team
We believe you are best served by working with a team of advisors to navigate the business succession planning process. A business succession plan includes decisions involving multiple disciplines: management and business consulting, business finance, business valuation, accounting, law, tax, personal finance, and family dynamics, to name a few. For many owners, the core team will include their attorney, CPA, financial advisor, and banker. Depending on the situation’s complexity and the skills required to implement the plan, your team may also involve other professionals during the process. For example, a business appraiser may value the business for intrafamily transfers, or an M&A advisor may assist with raising capital. As you build your team, we strongly advise identifying an advisor to facilitate the process and coordinate the team. In many cases, it is wise to engage a consultant who specializes in family business succession planning. This consultant can leverage your team of specialists effectively and efficiently.
Gather Information and Set Goals
You will work with your team to gather relevant business and personal information for consideration while developing the plan. For the business, this may include reviewing the business structure and organizational documents, understanding the business strategy, and clarifying the corporate finance needs. Personally, this may include preparing a personal balance sheet, understanding your cash inflows/outflows, taking an inventory of life insurance coverage, and reviewing your estate planning documents.
A family company that is healthy and successful over the long term requires that each stakeholder’s view be respected and integrated into the plans for the family business. We recommend that you interview key stakeholders associated with the family business during the discovery process. These may include owners, key employees, and family members. In our experience, engaging a skilled independent facilitator to conduct these interviews yields the best results. The “Three-Circle Model of the Family Business System,” shown below, helps to highlight the interplay between the various stakeholders of more complex ownership structures.
Finally, it is essential to clarify the business and personal goals you desire from the succession planning work. For a family-owned company, the owner’s business and personal goals often overlap and must be considered in concert. Business goals may include strategic initiatives, financial objectives, ownership goals (active vs. inactive; family vs. non-family; keep vs. sell), or talent-related objectives (management succession). Personal goals may consider retirement needs, estate planning/family legacy goals, and tax planning. These goals will serve as a guidepost as you evaluate transition-planning alternatives while developing the optimal plan for your enterprise.
Analyze
Once you have gathered the required information and identified your goals, your team will prepare the analysis needed to evaluate your succession planning options. A proper analysis combines the quantitative (business and personal financials) with the qualitative themes identified from the stakeholder interviews. Additionally, a business appraisal is typically conducted by a business valuation professional. This appraisal allows you to evaluate the financial feasibility of various ownership transition paths: keeping it in the family, sale to management, sale to an Employee Stock Ownership Plan (ESOP), or sale to a third party.
Importantly, preparing a personal cash flow analysis helps illustrate the impact of various succession scenarios on your retirement planning, estate planning, and charitable goals. The personal financial analysis is a critical step in the process.
You should evaluate the company’s management-succession needs concurrently with the ownership-succession analysis. Regardless of the keep versus sell decision, do not overlook planning for the business’s current and future talent needs. A business consultant with expertise in this area can provide a thorough assessment of the company’s leadership team, identifying areas for improvement. As part of this work, the compensation plans for the management team should also be analyzed to ensure that proper incentives are in place to retain key employees of the organization and align them with the business’s goals.
Putting it all together—Develop a Plan and Strategy
Informed by the analysis, you and your team will identify the succession plan that best aligns with the goals of the business AND your individual goals. The plan should address both the ownership- and management- succession needs of the business. It is a best practice to clearly document the succession plan and develop a communication plan for key stakeholders.
The strategy to implement the plan will vary depending on the path determined. In some cases, the timing may not be appropriate to implement a long-term succession plan and the primary focus will instead be on a contingency plan for unforeseen events such as the death or disability of the owner.
We have outlined some key considerations depending on the path chosen and will delve deeper into some of the strategies in future articles.
Keep it in the family
- Management succession considerations—Who will run the business? Are non-family members considered? What incentives need to be put in place to retain key employees?
- Ownership succession considerations—Who can own shares in the company? Will the company have active and inactive owners? Will shares be gifted or sold to new owners? If sold, on what terms?
- Family business governance considerations—Buy/sell agreements, board of directors/advisors, family council, family employment policies, etc.
- Retirement planning considerations for owners
- Tax and estate planning considerations for owners
Selling to a third party (Management, ESOP, financial or strategic buyer)
- Consider the timing of the transaction. Industry and market dynamics should be factored in, as well as the “business readiness.”
- Engage appropriate professionals to implement: i.e. M&A advisor, ESOP Consultant, Business Attorney, Tax Consultant.
- Identify opportunities to maximize the value of the business for sale.
- Address management team deficiencies.
- Include pre-transaction personal planning for the owner to take advantage of tax and estate planning opportunities, as appropriate.
- Retirement planning considerations for the owners
Take Action
At Bragg, we have the privilege of working with clients who have successfully navigated the transition of their family business. For some, the decision has been to retain ownership in the family and pass it down to the next generation. Others have decided that it was best to transition ownership via a third-party sale. In all cases, the owners have—with their team of advisors—invested the time and effort to navigate the best path forward for their business and family. We hope that you will do the same! Take action on your business succession plan as there is more at stake than just financial success; there is a legacy to preserve for you, your family, your employees, and your community.
Three-Circle Model of the Family Business System
Renato Tagiuri and John Davis developed the Three-Circle Model of the Family Business System at Harvard Business School in the late 1970s. It was first published in 1982 in Davis’s doctoral dissertation, The Influence of Life Stages on Father-Son Work Relationships in Family Companies. In 1996, the Family Business Review published it in Tagiuri and Davis’s classic article, Bivalent Attributes of the Family Firm. Read more about how the three-circle model came about in an article on Davis’s website, How Three Circles Changed the Way We Understand Family Business.
As the diagram illustrates, seven distinct stakeholders are possible with a family enterprise. To better understand each stakeholder’s concerns, we have provided below some questions that are likely on the minds of individuals represented by each group.
Family Member, Non-Owner, Non-Employee
- How is my last name affected by decisions made by the business?
- Will I or my children have an opportunity to work for the business? Are the rules for family employment fair and clear?
- Is ownership in the company a possibility?
Non-Family Member, Owner, Non-Employee
- How is my investment in the business performing? What cash flow can I expect from my ownership?
- Do I have confidence in the management team and the business strategy?
- When is the right time to sell the company to maximize value?
- Is there a well-thought-out management succession plan for the business?
Non-Family Member, Non-Owner, Employee
- What is the ownership transition plan for the business and how will it impact my employment?
- Will the company show priority to family members when it comes to career advancement opportunities?
- Will the business allow me to participate in the profits or growth of the business through some type of employee benefit program?
- At some point in the future, will the company allow me the opportunity to purchase ownership in the business?
Family Member, Owner, Non-Employee
- How is my last name affected by decisions made in the business?
- Is there transparency with respect to company performance and strategic decisions?
- What cash flow can I expect from my ownership in the business?
- Is there a path to liquidity if I no longer want to be an owner? At what price and terms?
- Will I or my children have an opportunity to work for the business? Are the rules for family employment fair and clear?
Family Member, Non-Owner, Employee
- How is my last name affected by decisions made in the business?
- Am I being treated fairly with respect to my compensation from the company?
- Will the company show priority to owner/employees when it comes to career advancement opportunities?
- At some point in the future, will the company allow me the opportunity to purchase ownership in the business?
Non-Family Member, Owner, Employee
- Will I have a chance to increase my ownership in the business?
- Is there a path to liquidity when I choose to retire or pursue another opportunity? At what price and terms?
- What are the long-term plans of the family for the business ownership?
- Are the rules for family employment fair and clear?
Family Member, Owner, Employee
- How is my last name affected by decisions made in the business?
- How valuable is my ownership stake relative to my employment income from the company?
- What is the ownership transition plan for the business and how will it impact my employment?
- Is there a path to liquidity when I choose to retire or pursue another opportunity? At what price and terms?
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.
Interest Rates, Inflation and Your Portfolio: Special Market Commentary
May 12, 2022Bragg Names Jen Muckley Chief Operating Officer
June 8, 2022My rising high school senior had the best intentions for the summer of 2021. After a challenging junior year, he was looking forward to a break from academics and the demanding schedule of school athletics. He planned to spend time with friends, have fun at the pool, and relax on family vacations. Less desirable responsibilities such as a summer job, SAT preparation, and summer reading would be worked into his “busy” summer schedule when time permitted.
Overall, he accomplished most of what he wanted and needed to do. However, his dreaded summer reading still loomed at the end of July. Assigned classics like A Tale of Two Cities and The Grapes of Wrath did not appeal to his 17-year-old brain, and he found himself stressed with only a few weeks left before school resumed. With a little help from his mom and me, he created an accelerated reading plan. He then worked diligently—although not always joyfully—to complete the assigned books with only a few hours to spare before his first day of class. Fortunately, the price of his procrastination was rather inconsequential: a couple of weeks of long days spent reading rather than hanging out with his buddies.
Of course, it is human nature to delay undesirable or difficult tasks until there is an urgent need to address the matter, even for items of high importance. In over twenty years of working with business owners, I have consistently observed this behavior when addressing the succession plans for family-owned companies. In its 10th Family Business Survey, PWC found that “only one-third of North American family business leaders say they have a robust, documented, and communicated succession plan in place.” If you are an owner of a family business, this statistic is likely not surprising. You can probably relate to some of the reasons I have heard from clients in the past:
The validity of each of the above reasons does not diminish the importance of a well-conceived succession plan for a family business. Too much time, energy, and resources have been invested into your family-owned enterprise to ignore the risks of failing to plan appropriately. Getting ahead of leadership and ownership changes can significantly improve the odds that your business will continue to thrive, and the family wealth you have worked so hard to create will be preserved.
We understand that the process of developing, documenting, and communicating a succession plan can be overwhelming. To help you get started, we have provided some best practices to guide you on the journey. The clarity brought by undertaking this vital process will help bring peace of mind to you and your family.
Build a Team
We believe you are best served by working with a team of advisors to navigate the business succession planning process. A business succession plan includes decisions involving multiple disciplines: management and business consulting, business finance, business valuation, accounting, law, tax, personal finance, and family dynamics, to name a few. For many owners, the core team will include their attorney, CPA, financial advisor, and banker. Depending on the situation’s complexity and the skills required to implement the plan, your team may also involve other professionals during the process. For example, a business appraiser may value the business for intrafamily transfers, or an M&A advisor may assist with raising capital. As you build your team, we strongly advise identifying an advisor to facilitate the process and coordinate the team. In many cases, it is wise to engage a consultant who specializes in family business succession planning. This consultant can leverage your team of specialists effectively and efficiently.
Gather Information and Set Goals
You will work with your team to gather relevant business and personal information for consideration while developing the plan. For the business, this may include reviewing the business structure and organizational documents, understanding the business strategy, and clarifying the corporate finance needs. Personally, this may include preparing a personal balance sheet, understanding your cash inflows/outflows, taking an inventory of life insurance coverage, and reviewing your estate planning documents.
A family company that is healthy and successful over the long term requires that each stakeholder’s view be respected and integrated into the plans for the family business. We recommend that you interview key stakeholders associated with the family business during the discovery process. These may include owners, key employees, and family members. In our experience, engaging a skilled independent facilitator to conduct these interviews yields the best results. The “Three-Circle Model of the Family Business System,” shown below, helps to highlight the interplay between the various stakeholders of more complex ownership structures.
Finally, it is essential to clarify the business and personal goals you desire from the succession planning work. For a family-owned company, the owner’s business and personal goals often overlap and must be considered in concert. Business goals may include strategic initiatives, financial objectives, ownership goals (active vs. inactive; family vs. non-family; keep vs. sell), or talent-related objectives (management succession). Personal goals may consider retirement needs, estate planning/family legacy goals, and tax planning. These goals will serve as a guidepost as you evaluate transition-planning alternatives while developing the optimal plan for your enterprise.
Analyze
Once you have gathered the required information and identified your goals, your team will prepare the analysis needed to evaluate your succession planning options. A proper analysis combines the quantitative (business and personal financials) with the qualitative themes identified from the stakeholder interviews. Additionally, a business appraisal is typically conducted by a business valuation professional. This appraisal allows you to evaluate the financial feasibility of various ownership transition paths: keeping it in the family, sale to management, sale to an Employee Stock Ownership Plan (ESOP), or sale to a third party.
Importantly, preparing a personal cash flow analysis helps illustrate the impact of various succession scenarios on your retirement planning, estate planning, and charitable goals. The personal financial analysis is a critical step in the process.
You should evaluate the company’s management-succession needs concurrently with the ownership-succession analysis. Regardless of the keep versus sell decision, do not overlook planning for the business’s current and future talent needs. A business consultant with expertise in this area can provide a thorough assessment of the company’s leadership team, identifying areas for improvement. As part of this work, the compensation plans for the management team should also be analyzed to ensure that proper incentives are in place to retain key employees of the organization and align them with the business’s goals.
Putting it all together—Develop a Plan and Strategy
Informed by the analysis, you and your team will identify the succession plan that best aligns with the goals of the business AND your individual goals. The plan should address both the ownership- and management- succession needs of the business. It is a best practice to clearly document the succession plan and develop a communication plan for key stakeholders.
The strategy to implement the plan will vary depending on the path determined. In some cases, the timing may not be appropriate to implement a long-term succession plan and the primary focus will instead be on a contingency plan for unforeseen events such as the death or disability of the owner.
We have outlined some key considerations depending on the path chosen and will delve deeper into some of the strategies in future articles.
Keep it in the family
Selling to a third party (Management, ESOP, financial or strategic buyer)
Take Action
At Bragg, we have the privilege of working with clients who have successfully navigated the transition of their family business. For some, the decision has been to retain ownership in the family and pass it down to the next generation. Others have decided that it was best to transition ownership via a third-party sale. In all cases, the owners have—with their team of advisors—invested the time and effort to navigate the best path forward for their business and family. We hope that you will do the same! Take action on your business succession plan as there is more at stake than just financial success; there is a legacy to preserve for you, your family, your employees, and your community.
Three-Circle Model of the Family Business System
Renato Tagiuri and John Davis developed the Three-Circle Model of the Family Business System at Harvard Business School in the late 1970s. It was first published in 1982 in Davis’s doctoral dissertation, The Influence of Life Stages on Father-Son Work Relationships in Family Companies. In 1996, the Family Business Review published it in Tagiuri and Davis’s classic article, Bivalent Attributes of the Family Firm. Read more about how the three-circle model came about in an article on Davis’s website, How Three Circles Changed the Way We Understand Family Business.
As the diagram illustrates, seven distinct stakeholders are possible with a family enterprise. To better understand each stakeholder’s concerns, we have provided below some questions that are likely on the minds of individuals represented by each group.
Family Member, Non-Owner, Non-Employee
Non-Family Member, Owner, Non-Employee
Non-Family Member, Non-Owner, Employee
Family Member, Owner, Non-Employee
Family Member, Non-Owner, Employee
Non-Family Member, Owner, Employee
Family Member, Owner, Employee
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.
More About...
The Power of Congruence: Aligning Values, Beliefs, and Actions
Read more
Financial Health: Lessons from the Doctor’s Office
Read more
Your 2024 Year-End Planning Checklist
Read more
FAFSA Changes Are on the Way
Read more
The Best Account of All
Read more