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I’ll admit, I’m not a big fan of rollercoasters. But if you’ve ever been involved in, employed by, or have friends or family involved in a family-owned business, succession planning can feel like one scary ride.  Family business succession can be defined as the transition of management, authority and responsibility for the business’ operation and ownership from one or a group of family members to another.  All too often, it is a precarious time of change for the company and shareholders, as new executives and staff adjust to new management styles, strategies, rules and relationships.

A recent study by Lloyd P. Steier and Danny Miller, released in the September 2010 issue of the Journal of Family Business Strategy, looked at thirteen family businesses, with at least $8 million in annual sales and 50 or more employees.  The study broke out its finding into two phases.  Phase I was the succession period, which was defined as beginning at the initial discussions about replacing a family owner-manager and lasting until a replacement could be found (a period that can take years)Phase II, the post-succession phase in this study, lasted from 4-20 years. Phase I characteristics included:

1. Inclusiveness. The desire to keep the family active in the business and to involve as many family members in the business as who were willing to participate. Often the focus was enlisting the younger generations through jobs and incentives.

2. Keeping the ownership within the family. Ownership was generally viewed as a birthright.  Family members who choose to leave often wanted to be compensated for relinquishing their birthright.

3. Equal distributions of ownership. The rewards of ownership along with a sense of egalitarianism among the family members and a selfless duty to take care of one another characterized most of the owner/managers.  But, equal distribution of rewards sometimes gave rise to conflicts when decisions were based on kinship rather than ability or skill.

4. Family harmony. While the study found family harmony was highly desired, preserving harmony was hard to maintain during the upheaval and transition of Phase I.  To reduce sibling conflicts and achieve consensus most businesses made efforts to involve more members in the decision-making process.

5. Keeping management in the family. Decision making during the succession phase was often reflected in a desire to keep management within the family.  Outsiders were sometimes viewed as not likely to have the family’s best interests at heart.  While the family business was a source of pride, challenges arose in different management styles, and the right to manage versus the right to own the business.

6. Legacy. Succession raised concerns about the need to preserve the family legacy.  The study found that legacy was not only viewed as wealth and assets, but the family’s image and reputation.  Most in the study, expressed a desire to recognize their predecessor’s values and strategies.  “They highlighted legacy, rather than profit as the ultimate aim of the business,” according to Steier and Miller.

Phase II or the post-succession period was characterized by:

1. Emphasizing management skills. The tendency from Phase I to focus on kinship shifted to an emphasis on skills, or a more business-like rationale for seeking a leader.

2. Reducing family managers. The families tended to create more formal arrangements to govern their involvement, which also helped to clarify roles, authority and responsibility.

3. Concentration of ownership. Family shareholders were reduced in number or bought-out. Sometimes this was due to family conflicts or coupes, but other times it was brought about by a family consensus.

4. Rebirth. Often new leadership gave way to fresh perspectives. As individuals became more comfortable in their roles, they expressed more confidence in their ability to lead, which included adding outside talent, adopting new strategies and sometimes moving away from the business’ legacy. Several businesses put structures in place to keep the business in check. Advisory boards were sometimes set up to allow the leadership to remain in the family while being surround by external experts.

For estate planning, this holistic view of family succession planning helps not only family members to better plan for and prepare their business for the transition from one generation to the next but it can help reduce the potential for future conflicts.  While the process can be painful and froth with challenges, knowing what successful succession outcomes look like, can make the process easier.

If you are involved in a family business, our office would be delighted to talk with you about some of the legal steps that can be taken to not only protect your assets and preserve your legacy, but to reduce potential challenges down the road.  I urge you to share this article with your family as a way to start your family thinking about the best approach to family succession planning.

Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning
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