Business transition: Plan early, communicate often

A 2012 study concluded that about half of family business owners intend to pass the company on to the next generation.

Lisa Shelton
LISA SHELTON The Lowery Shelton Group at Morgan Stanley

This edition of Tip of the Week was provided by Lisa Shelton, financial advisor, The Lowery Shelton Group at Morgan Stanley. She can be reached at 360-992-7994.

If you have yet to navigate the often choppy waters of transitioning the business to your heirs, or if you are about to embark on that journey, here are some of the potential pitfalls in that process.

A slippery slope

Family business experts found that only about one in three companies successfully execute an inter-generational business transition, with the leading causes of failure attributable to:

  1. Breakdown of communication and trust within the family unit: 60 percent
  2. Inadequately prepared heirs: 25 percent
  3. Absence of a clear vision or mission to align family members: 12 percent
  4. Failure by advisors to properly address taxation, governance and wealth preservation issues: less than 3 percent

Pathways to success

With success riding largely on a family’s ability to communicate and to clearly articulate a plan for the future, the following guidelines may help to ease the business transition process.

Start planning early. Get the process started years before the actual transition occurs. Some experts recommend building an exit/transition strategy into the initial business plan.

As part of the planning process, business owners should create:

  • Supporting structures, such as a family constitution and business bylaws to familiarize all parties with the rules of governance. Fewer surprises mean fewer conflicts and discord down the road.
  • A clear vision for the business that involves all family members, whether or not they are active in running the business. Visioning is an effective method of allowing all stakeholders to share their personal goals for the business, which in turn helps create buy-in and minimize future conflicts.

Prepare the next generation. Identify the skills and leadership qualities the business may need in the future, and then prepare young family members to fulfill those roles. This will likely require sharing knowledge and providing educational opportunities.

Manage conflicting priorities. It is not uncommon for younger and older generations to have differing, and conflicting, priorities for the business.

  • Senior leaders may have concerns about whether the younger generation “has what it takes” to successfully run the business; anxiety about the next chapter of their lives (retirement, staying involved in some capacity); or worries about all children, including those not involved in the business, receiving a fair share of the family wealth.
  • Members of the younger generation may be anxious “making their mark” on the business by taking it in a new direction; investing in new technologies or processes that may improve the business but require a significant capital outlay; and micromanaging by an owner remaining involved in day-to-day operations.

It is important that families express their concerns openly, and it may help to engage a professional facilitator. When all parties feel they are being heard and respected, the sense of commitment to the business – and the transition process – is strengthened.

Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

Morgan Stanley Financial Advisor(s) engaged VBJ to feature this article.

Lisa may only transact business in states where she is registered or excluded or exempted from registration Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Lisa is not registered or excluded or exempt from registration.

Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Smith Barney Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.

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