Eric J. Smith, Senior Business Transition Strategist, Wells Fargo Bank
Arne Boudewyn, Head of Family Dynamics Consulting, Wells Fargo Bank
- Preparing the next generation to take over a family business is not easy — statistically, only one in three family businesses transition successfully to the next generation. It’s important to understand the reasons why as you navigate your own transition journey.
- Families who have successfully navigated major wealth and business transitions tend to share a set of identifiable best practices. These actionable lessons can be leveraged to help improve transition outcomes.
What this may mean for you
- Preparing the next generation for family business stewardship is a process that requires intention and a clearly articulated plan. Eight best practices are recommended to help achieve business transition goals.
Whether you are contemplating selling your business one day to a third-party buyer or passing the business down to the next generation, there are several best practices that family business owners can use to help prepare the next generation for business or wealth stewardship. Some of those best practices relate more to the finances of the business while others address interpersonal family issues, but all are critical to the stewardship of the legacy you have worked so hard to create.
Studies have consistently shown that families have roughly a 30% chance of successfully transitioning their business from one generation to the next.1 Factors that can interfere with successful transitions include:
- Insufficient communication and an absence of trust within the family system
- Inadequately prepared next generation family members
- Absence of a clear vision or mission to align the family cross-generationally
- Failure by professional advisors to properly address taxation, governance, and wealth preservation issues
When asked to rate the difficulty of achieving specific corporate objectives, family business owners rate two issues in particular as being both highly important and difficult to achieve. The first relates to resolving conflicts among family members working in the business, and the second relates to formulating a family business succession plan. Interestingly, these issues are rated as more important and more difficult to achieve than developing strategic plans to sustain or grow the business. The results of these two surveys2 suggest that issues pertaining to family dynamics are top of mind for many wealthy family business owners as they contemplate family business transitions.
Eight best practices for family business transitions
Understanding why transitions fail is important. But identifying the best practices of families who have successfully navigated a major wealth transition is equally or more important if family business owners want to increase the odds of a successful business transition and position the business for effective stewardship by the next generation. Families who successfully navigate major wealth transitions tend to share the following best practices:
- Start their transition planning early.
- Articulate a clear vision to family, employees, and key stakeholders.
- Formalize governance structures and processes as part of their larger business plan.
- Actively work to prepare the next generation.
- Communicate the transition plan to the family.
- Proactively anticipate and address where potential conflict might arise in executing the plan.
- Build an experienced transition management team.
- Develop a written business succession plan with an implementation timetable.
Preparing the next generation involves more than focusing on individual roles and formal education, job training, or financial education. Transitioning stewardship of a family business from one generation to the next is best approached as a long-term process that incorporates — and encourages next generation participation in — all eight best practices.