The Family Business Succession Playbook

Insights

Legend has it that Andrew Carnegie, an all-time titan of industry, once commented on the challenge of preserving family wealth beyond three generations. He called the cycle one of “shirtsleeves to shirtsleeves:”

• The first generation rolls up their sleeves and gets to work
• Their profligate grandchildren—used to leisure and ease—spend the business into ruin
• So the subsequent generation must once again roll up their sleeves and get busy

If you helm a family business, you yearn to avoid this fate. But obstacles abound. What if your children don’t want to run the business? How do you draft a bulletproof succession plan? 

Fortunately, with a mix of strategy and foresight, it is possible to successfully pass the baton.

#1 Paint a Positive Picture

A seamless transition begins with positive vibes. When planning to pass the baton, don’t picture succession as a single event looming on the horizon. Instead, consider it a process, one that begins long before official planning. 

Lay the foundation early. When discussing business around your children, take care to portray it in a positive (but realistic) light. If children absorb only negativity regarding the business, they may think: “Why would I want that in my life?”

Rather than venting about supplier snafus or funding challenges, highlight the rewarding aspects, such as:

• Personal growth
• Autonomy (“being your own boss”)
• Financial freedom
• Creativity

This doesn’t mean you should sweep the challenging aspects under the rug, however. Simply aim for a nuanced perspective that highlights the positive. 

#2 Instill Strong Foundations

For children born into a family business, it’s easy to imagine that it sprang from the ground, fully formed. Dispel this myth early on by outlining the founding history and guiding principles key to its success.

Of course, as a founder, you may find it difficult to articulate your journey—you’re too close to it. Plus, you carry the added complexity of a parental relationship, which can complicate attempts at teaching.

For best results, pair your children with a mentor. A veteran employee with ample experience who can provide a balanced perspective and shrewd guidance. 

Most importantly, ensure that the next generation understands the reasons behind current strategy and policy. This helps banish the unhelpful notion of “divine origins”.

#3 Craft a Succession Plan

Rather than a haphazard handoff, take time to think through your approach and its potential pitfalls. Begin by asking questions. 

Hard questions. 

Questions like:

• What roles and responsibilities will the next generation assume?
• What areas should senior non-family leadership monitor going forward?
• Who might serve as valuable mentors for second (or third) generation leaders?
• What factors might upend this process, and how can I address them?
• How does the ideal outcome differ from the current situation?

Start this discussion early and involve your children. Enlisting a top notch wealth management team, one well-versed in succession planning, can also bring an experienced, impartial perspective to the debate.

#4 Maintain Transparent Communication

A well-crafted succession plan means little if your successors, and other key stakeholders, aren’t clear on its content and intentions. 

Discuss the entire vision with all parties. Open the floor for feedback. Take any concerns or suggestions seriously. The more your children and key employees feel they’ve been heard and involved in the process, the more they’ll invest in carrying out the plan. 

Once agreed upon, furnish the entire staff with a copy of the transition plan and its expected impact on their role and future with the company. No one should feel blindsided by the vision.

#5 Address the “Pitfalls of Wealth”

Children of financially successful parents, especially ones that lead family firms, face a multitude of challenges. 

• An affluent childhood often shields second and third generations from the hardscrabble aspects of business management. 
• It can also insulate them from the consequences of destructive habits, while encouraging an excessively “carpe diem” attitude when it comes to spending.

An undisciplined and spendthrift second gen often represents the founders’ greatest fear—and fuels a reluctance to hand over the reigns. 

To address this problem, begin by instilling positive values:

• Balance providing for your children with encouraging the entrepreneurial spirit
• Emphasize the precariousness of wealth, and weed out entitlement at every turn

Craft a “family values” statement, one that outlines what you stand for, and the legacy you wish to leave behind. When children feel the family business transcends mere money, they’re more likely to confidently step into their role as stewards.

Succession: Start Today, With Tomoro

Carnegie’s quote, while wise, doesn’t have to be fate. Succession remains a delicate process, but with proper planning, you can successfully pass on both your business and your values. 

At Tomoro, our expert team specializes in wealth management solutions geared toward sustaining generational prosperity. Succession planning forms the backbone of that process.

With decades of combined experience, and an embrace of your unique financial path, our team stands ready to guide your business into the next generation and beyond. Discover how we can help. Let’s talk today.