A Plan For Succession - Short Term and Not Strategic

The New York Times The Beginnings of a Succession Plan  got me thinking about “succession” which is a term that gets tossed about by many,  without deeper thought as to what it means.

 

What is Succession?

Succession can be short term… meaning insuring short term business viability due to sudden and unforeseen circumstances. Although what many people view as unpredictable is really what family business transition specialists call predictable transitions and clearly one of those is death of the founder. 

However for many family businesses, succession means passing the baton to the next generation. The definition of generation gets “muddy” but the consensus is 20 to 25 years. So when dealing with succession,  core strategic issues come into play which unfortunately many do not want to deal with.

Shouldn't a major goal for succession be the determination of the viability of the business for the next generation… out 20 plus years? 

 

Family Businesses are Not Perpetually Viable

We now have what I call structural ambiguity present in the economy and the business environment. Assumptions that were prudent in planning and forecast in the past probably are now mostly irrelevant. And most of those in the helping professions, accountants, financial planners and attorneys get stuck in the tools of legal and financial succession. 

Far too many family members and their advisers assume “perpetual business viability” and the next generation simply cannot assume business viability for another 20 years. So just because the business may have been family owned for several generations past, I say… so what? 

 

The Overlap of Family and Business

The above is most difficult to do since the Family-Business overlap is so strong and the “family” component is highly emotionally charged. I hope to see more discussion on succession that addresses the strategic viability of family owned enterprises for this is the responsible thing to do for that next generation so they are not saddled with businesses where the window of opportunity may be closing or has already closed.

Is the window of opportunity closing at your family business?

You may enjoy reading The Most Important Family Business Goals .

All the best!

Dom Celentano

New Jersey Family Business Advisor

Tips to Investing With Family

As soon as you decide to invest in your child's future business, it begins to resemble a Family Business… and this where the complications begin. If you want to learn more about Family Business visit my Fairleigh Dickinson University Academic Site. Here are some tips and insights on family business.



This type of investment begins to have the overlap of Family, Business and Ownership, and needless to say the "Family" part has the most influence. The Venn diagram here is the illustration of this overlap and is the cornerstone of describing a family business.

You probably want to evaluate your son or daughters business investment request and they should create some form of business plan. You may immediately consider having your accountant look at this family business plan. I would not advise banking solely on your accountant to evaluate the business plan. Use the accountant to perform a critical analysis of the proformas.



However a family business plan is much more than financials.  My viewpoint is this:

• It is the articulation of how an idea is put through a feasibility analysis
• If feasible, then the development of a marketing plan. All business rest on the success of "going to market", hence the critical importance of a marketing plan.
• If you can create a convincing marking plan, and this is another areas where you should have a 3rd party review, an Operating Plan would come next.
• Build Up Sales and Cost Assumptions come next to create your financial financial forecasts.

A better approach to 3rd parties is to include other business professionals along with your accountant. These can be consultants and Small Business Development Centers. A great resource is seeking out a university that has an Entrepreneurship Department. There are many professors and MBA students that can help in the business plan evaluation. For example we have our Business Ventures Program, that works with entrepreneurs to refine their plans for greater success. This is one way to be objective AND create the necessary boundaries between parent and investor.



A wonderful structure is The Family Bank. It allows you to invest in your children and have some structure and boundary separation. You can structure this as formal as your needs determine. It allows the parent to wear two hats:

•  the parent hat
• the investor hat.

It allows you to say "as your parent I want to support you as my child", and then you can flip the hat to say "as your financial backer, here is what the 'bank' needs to make a decision".



The great thing about a Family Bank is it allows the return of capital to the "bank". The Family Bank is what we call patient capital, giving your children the extra breathing room they need to establish the business with feeling entitled the money, just because they are the son or daughter.



The return of principle and interest to the bank allows the parent to reinvest in the future for other children and/or to preserve and hopefully grow the family economic capital. It preserves the financial estate for the next generation.



All the best!

 

Tips on Family Business

Dom Celentano

Visit my Silberman College of Business Academic Site