By Joseph N. Filosa, CFP® Financial Advisor, Principal, Opal Wealth Advisors
Recent research from PwC indicates that nearly two-thirds of family businesses don’t have a documented and communicated succession plan. And while succession planning is important for all businesses, it’s absolutely vital for family-owned companies that face unique and nuanced complications when it comes to transitioning ownership (evidenced by the fact that only 30% of family-owned businesses in the United States transition to the second generation, and only 12% into the third).
Succession planning is about more than deciding who will take over ownership and day-to-day operations. It’s the comprehensive process of, yes, first identifying who will step into a leadership role or role, then developing the necessary skills and comprehensive transition plan to ensure a seamless shift in responsibilities and maintain organizational stability when the time comes.
For family businesses, effective and thorough succession planning can prevent disputes and reduce the risk of both emotional and financial conflict while giving current owners time to mentor the next generation of leadership. However, I’ve also seen firsthand the implications of inaction or poorly documented and communicated succession planning, which can affect not just the business itself but also the family’s wealth and well-being.
At Opal Wealth Advisors, we work hand-in-hand with small business owners who wish to transition their companies to next-generation family members upon retirement. As a third-generation business owner myself, over the years, I’ve found these are the four most important factors in determining whether a successful transition will occur:
1) Starting early
Starting the succession planning conversation early gives both the existing business owners and their successors time to:
- Prepare for what the transition should look like
- Establish goals for the succession plan itself and the future of the business
- Implement necessary training under the guidance of current leaders
- Work through any disagreements about the business’s future
- Document and optimize the plan itself
Even if retirement is far off for a business owner, the time is now to start thinking about and executing a succession plan. An emergency could leave the current owner unable to continue in his or her leadership role, for example, putting both the business and the family’s finances in jeopardy if a succession plan isn’t established and documented. I’ve also seen cases wherein the incumbent heir to the proverbial business throne didn’t actually want to take over, causing conflict and turmoil that could have been avoided with a proactive approach to succession planning.
2) Establishing clarity around timeline and responsibilities
A vague succession plan is almost as bad as no succession plan at all. Establishing clarity for all stakeholders around timelines and responsibilities sets concrete expectations for a smooth transition of leadership, helping to mitigate uncertainty and foster accountability.
Delineating specific roles and responsibilities prevents potential gaps (or overlaps) in leadership, making sure all critical functions are accounted for during the transition. This is important for maintaining operational continuity, preserving the trust of employees, stakeholders and customers, and keeping the business running fluidly during what can be a tumultuous period of time.
3) Understanding the business’s value
Business valuation will play an important role in the execution of a succession plan, so it’s important for stakeholders to be aware of what the business is worth and in what direction the value is trending throughout the business lifecycle.
This helps current and future business owners understand whether the business is tracking toward established goals despite changes to the organizational structure. It also offers insight into any necessary action to right size profitability, revenue, debt reduction, and insurance coverage.
4) Communicating often and revisiting the plan as needed
Perhaps most importantly, business owners should avoid viewing a succession plan as static and unchangeable. Set it and forget it is decidedly not the right strategy here, as both external and internal factors could dramatically impact an established plan.
From shifting economic and market trends to evolving family dynamics, even the most comprehensive succession plans are susceptible to changing tides. I recommend gathering key stakeholders as often as annually, and more often as retirement for current owners gets closer, to review the established plan and make any necessary changes.
Business owners are often understandably so focused on the day-to-day responsibilities of running their businesses that preparing for the future falls by the wayside. But for family businesses, the implications of waiting too long to establish a succession plan can be dire. Start early, revisit often, and over-communicate if necessary to protect your clients’ family businesses and wealth for years to come.
IMPORTANT DISCLOSURE INFORMATION
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Joseph N. Filosa, CFP®, is a Financial Advisor and Principal of Opal Wealth Advisors in Jericho, NY. As a founding partner at Opal and a business owner himself, Joe brings a deep understanding of the challenges and complexities that come with running a business—especially one that is family-owned. Committed to improving young lives, Joe volunteers to teach financial literacy in underserved communities and serves on the Board of Advisors at St. Elizabeth’s Catholic Academy.
