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:
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.
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.
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.
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.
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)
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.
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.