The Impact of Exit Planning on Successful Family Business Transitions

Do you understand the impact your family dynamics have on your business? How can family conflict derail your business exit? Like all businesses, family businesses must have a cross-functional team of advisors to help manage their value prior to and during a transition of ownership. Who is on your exit planning team? And more importantly, are they prepared to help you harvest the most value out of your business during the exit?

Family Business Transition Success Rates

Family businesses make up over 35% of Fortune 500 companies. According to Businessweek, “About 40% of U.S. family-owned businesses transition into a second-generation business, approximately 13% are passed down successfully to a third generation, while 3% survive to a fourth or beyond”. Additionally, recent research from Exit Planning Institute found that 45% of family business owners have never had a family meeting pertaining to their business. 

According to our 2021 New York State of Owner Readiness Report, 58% of business owners reported their business was 100% family-owned. As a family business owner, having serious conversations about the future of your business is paramount for its success. About half of business owners want to transfer their business to a child but only 30% do so. Families are not without their conflicts, especially in family businesses. 32% of family businesses surveyed by PWC in 2012 were apprehensive about the transfer of the business to the next generation and 9% saw the possibility of family conflict as the cause of this apprehension. 

This apprehension leads to succession plans being pushed aside for as long as possible. While an owner might know they want one of their children to take over the family business after they retire, they have no set plan for how to transition their business to the second generation. Failing to plan has led to 47% of family business owners who would like to retire in the next five years not having a successor.

Family Members vs. Management Team

Family-owned and operated companies must have alignment between family members and management when it comes to the business vision and plans. Without a complete and detailed succession plan in place, the likelihood of a successful intergenerational transfer is slim to none. According to the PWC 2016 Family Business Survey, 43% of Family Business Owners have no succession plan in place. Believing that transferring your business to your child is as easy as a simple handshake deal greatly diminishes the value of the business. 

Handing over your business to a child without planning can create hostility in your management team as well. Key employees may become flight risks after feeling slighted in succession discussions. With the addition of a detailed family exit plan, you increase the value in your company through value acceleration, prepare your successor with an organized report of financial information, and include management team leaders in the process.         

A Family Business Advisor

As a business owner, your family business advisor is a crucial member of your transition advisory team. They assist in managing collisions between the family and business dynamics. Selling the largest asset impacts the family. According to research presented by the Telos Group during our CEPA Online credentialing program, 95% of children who inherit a family business after both their parents pass will choose to leave the advisor who worked with their parents. This is a concerning statistic as it highlights the necessity for advisors to include the children in the family business discussions early on. 

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