Succession Planning for Family Businesses: Three Pitfalls to Avoid
Contracting or working a trade tends to go hand in hand with running a family business. Making the transition from one generation to the next, however, takes skill and preparation. As leadership loosens their grip on the reins, others must be ready to accept the responsibilities that come with maintaining continuity and stability—two things that require wise and timely decision making.
Whether you’re creating a long-term strategic plan or proactively preparing just in case an emergency strikes, careful business succession planning can ensure that your family business will remain profitable for generations to come.
Generational Shifts in Succession
According to Score—a resource partner of the U.S. Small Business Administration—"family-owned” refers to any business in which two or more family members operate the company, and the majority of ownership or control lies within a family. Making the transition from one generation to the next, however, is a challenge for many family-owned businesses:
- A little less than a third—30%—survive the transition from first-generation ownership to second-generation ownership.
- Even fewer—12%—survive the transition from second-generation ownership to third-generation ownership.
Adding a bit more perspective, Cornell University’s SC Johnson College of Business cites that about a third of family business members—32%—are apprehensive about the transfer of the business to the next generation, and 9% admitted to seeing the possibility of family conflict as a result. In fact, only about 3% of businesses survive a transition of four generations or more.
Business Succession Planning Pitfalls and Strategies
With the odds seemingly against successive successions, the need for succession planning becomes vital to a family business’s longevity. Many of the pitfalls to successful successions, however, are quite common and can be quite challenging. The best course of action, naturally, is to have a plan in place well before the reins are handed over.
1. Lacking a Formal Succession Plan. Many family businesses rely on informal verbal agreements or assumptions based on casual conversations about who will eventually take over. However, if something unplanned happens—a health-related event or death, for example—default legal conventions will go into effect if no formal legal documents concerning succession are in place.
- If the business is a sole proprietorship, the business has no separate legal identity. Assets and liabilities become part of the owner’s estate, and the executor or administrator of the estate decides what happens next. If the business is sold or passed to heirs, they may have to establish a new business identity.
- If the business is a partnership, without a formal agreement specifying succession terms, state laws under the Uniform Partnership Act may govern. Louisiana, however, does not follow the Uniform Partnership Act and instead relies on its own civil code. In Louisiana, the partnership typically dissolves upon the death of a partner unless a formal agreement specifies otherwise. Even so, surviving partners may need to buy out the deceased partner’s share—which can lead to valuation disputes.
- If the business is an LLC, ownership transfer may pass to heirs or next of kin, but depending on LLC operating agreements, heirs may not automatically gain control of operations. They are considered assignees, receiving economic benefits but not able to participate in business decisions unless the other members agree.
Having a formal, legal succession plan in place ensures that what you intended does in fact happen. The succession will take place without ambiguity or reliance on default state laws, and you can even include provisions like buyout clauses, valuation methods for shares and other directions for a smooth transition.
2. Failing to Give Employees Formal Job Titles. In family-owned businesses, the dynamics of personal relationships often overlap with professional responsibilities. This can create challenges in defining roles not only for day-to-day operations but also for succession planning. Family members may inadvertently assume overlapping duties yet leave critical areas unaddressed or create friction when decisions must be made.
Some high-contributing members or even nonfamily employees may feel sidelined while an heir may assume a leadership role without fully understanding their duties or being qualified to handle them. Instead, using job titles offers a number of long-term advantages:
- Clarity of Roles and Responsibilities. Defined job titles ensure that everyone knows their duties and lanes of responsibilities, reducing overlap, conflicts and confusion. Titles also formalize the contributions of each family member as well as any nonfamily employees, helping to distinguish between business operations and family dynamics.
- Clarity of External Perceptions. Customers, clients, vendors and other stakeholders need to know who to contact for specific issues. A lack of professional titles can lead to conflicting decisions and the perception that the business is disorganized—especially during a transition.
- Clarity of Qualifications for Succession. Clear titles and roles allow for easier identification of successors qualified for specific positions or promotions, for example. Succession planning requires understanding who handles critical functions, such as finance, operations or sales, for example. Job titles help map out the areas requiring a leadership transition and the skills needed to handle the full responsibilities of leadership in those positions.
3. Neglecting Documentation Detailing Operational Procedures and Policies. Much of the day-to-day knowledge and decision making often resides in the minds of owners or a few key individuals. While this often works well while those individuals are actively involved, it can become problematic during transitions. Without written processes, policies and guidelines, successors may struggle to maintain the business’s operations, values and reputation.
Formal documentation transforms critical knowledge into a lasting, transferable reference resource. It also signals professionalism to stakeholders and helps ensure a seamless handover of responsibilities. Four areas are especially important to document:
- Operational processes include information on daily workflows, supply chains, customer service protocols and vendor relationships, for example.
- Policies include human resource guidelines, financial policies, quality control measures and safety protocols.
- Strategic vision statements detailing the business’s mission, values and long-term goals ensure successors understand guiding principles.
- Business succession plans should include clear guidelines for how leadership transitions will occur as well as timelines, expectations and key training milestones for leadership candidates.
Meeting Goals for Future Success. The goal of business succession planning is about safeguarding the legacy, stability and success of a business for everyone involved—family and nonfamily members alike. By defining roles, documenting processes and creating clear strategies for leadership transitions, businesses can preserve critical knowledge and avoid disruptions.
For family members, planning clarifies expectations and responsibilities, reducing potential conflict. For nonfamily employees, it signals stability and opportunity, showing that their role in the business remains valued and secure. Most important, succession planning preserves the business’s mission and values, ensuring it continues to flourish for generations to come. A proactive approach benefits everyone by fostering confidence, continuity and growth even in times of change.
From Our Business to Yours
At Coburn’s, we understand the challenges you face in growing and preserving a family business. For 90 years, we’ve remained family-owned, providing commercial and residential plumbing, electrical, waterworks and HVAC products and services.
We remain every bit as committed to offering solutions and support to the residential customers, hard-working tradespeople and commercial contractors who rely on us as we were in the beginning. Before you start your next project, visit your local Coburn’s, and let our family-owned business help yours grow to the next level.
References:
https://business.cornell.edu/centers/smith/resources/family-business-facts/
https://www.familybusinesscenter.com/resources/family-business-facts/
https://resources.uwcc.wisc.edu/Business%20Conversion/Owners_Guide_Succession_Planning.pdf
https://www.investopedia.com/terms/s/succession-planning.asp
https://wiserinvestor.com/what-should-succession-planning-for-a-small-business-include/
https://canopy.uc.edu/undergrad/news/detail?feed=uc_news&id=b7881d6e-4650-5cc7-846d-1c616dc046da