Planning for family succession

Look across the Pacific Northwest and youll see the mark of family businesses everywhere. Families are behind many prominent employers such as Nordstrom, Bartell Drugs and Paccar as well as smaller companies. They make up a significant segment of suppliers to our major industries, service providers to our population and contributors to our communities. Chances are, in some way, you do business with family-owned businesses every day.

Like most businesses, family firms strive for longevity, and succession planning is a critical element for the smallest shops and up to the largest enterprises. This longevity is important not only for a firms profits, valuation and business continuity, but also for community impacts like employment, sales and tax revenue, and contributions to the Pacific Northwest as a vibrant center of commerce.

For family businesses, there are other factors involved in longevity, such as whether they can identify future leaders from within the family or need to look externally, provide a career ladder and professional development tool for multiple generations, or maintain the familys wealth, philanthropy and legacy strategies.

Survey after survey, including our own national and regional research, shows that succession is a serious issue for family businesses, yet many arent planning ahead. Most family business leaders want the company to stay in the family but only 30 percent of family businesses across the country have written transition plans, and 25 percent of companies in the Pacific Northwest spend little or no time on succession planning. Clear succession planning can get leaders on an early path to success, minimize potential conflicts between heirs and establish stability for business continuity on which families and family firms rely for both income and community impact.

For all business, engaging stakeholders across management, ownership, customers and suppliers is a first step in successful succession.

For family business leaders, the family members themselves become an additional audience. Not all family members will have ownership in the firm, but they can influence decisions about the business. Indeed, weve found that understanding and satisfying the needs and wishes of family members can actually improve profitability.

A strong succession plan should open the door to the future. Whether passing the business to younger family members or transferring private shares to a senior manager, planning early helps identify the next line of leaders, allows them time to learn to run the business and gives current leadership time to mentor.

Just as important as succession is accession. Not all family members will join the business but, for those who do, understanding expectations is critical. To be successful, family business leaders can, for example, establish and communicate guidelines for entering the business, what level of schooling and outside work experience is expected, and how compensation will be established. Making these distinctions clear early on will minimize potential conflict later.

Finally, the family business leader with a transition on the horizon needs to diversify income. In the Pacific Northwest, family business leaders report an average of half of personal net worth tied up in the family business and only half said senior generation shareholders have written and signed estate plans.

Diversifying wealth and holding financial assets independent of the family business will help eliminate conflicts between the need for retirement income and the business need for operating and expansion capital. These steps also minimize risk for family shareholders. If for some reason the business declines, so does the familys biggest asset.

The Pacific Northwest is home to a unique pioneering spirit, and family businesses have a vital role to play. They provide jobs and community stability, and promise the path to financial freedom for many individuals and their relatives. But they also face a unique set of challenges along the way. Communicating, planning and diversifying early will keep them on the road to success.

Robert Moser is president and CEO of wealth advisory firm Laird Norton Tyee. He can be reached at 206.464.5100 or [email protected].