Planning a Successful Future for Your Family Business Enterprise

An effective business succession plan provides the framework for the future of your business – and your family

Succession Planning............................. 2

The Three Circle Model........................ 3

Family Governance .............................. 3

The BB&T Wealth Family Business Study Framework................................. 4

The BB&T Wealth Family Business Study Findings ...................................... 5

Conclusion............................................. 7

2 Planning a Successful Future for Your Family Business Enterprise

You’ve spent years growing your company. But have you taken time to consider what the future may hold for your business and the family members who are now part of it – as well as those who may join it in the years to come?

Many decades of experience serving family businesses have shown BB&T that owners often walk a delicate line between the needs of their companies and the expectations of their family members. This is especially true as they prepare for future transitions in company ownership and management.

Business transition planning is a critical concern that owners often put aside while tending to the day-to-day responsibilities and activities of managing their businesses. But it’s an important issue that is most effectively addressed with early attention and action.

To ensure that we clearly understand the unique needs of business owners and are equipped to assist them as they prepare for future transitions, BB&T recently sponsored independent research into core business succession issues they may face. A summary of our fndings is provided here to help owners consider issues that may affect the success and wellbeing of both their businesses and family members – in the near future and across generations.

Succession Planning Succession planning is crucial for sustaining family enterprises for generations. An effective plan is far more than the selection of a successor. It also includes ongoing leadership development and communications to help avoid unnecessary conficts and to meet the needs of both the business enterprise and family members.

The succession plan can assume that everything will go well, but it also must include contingencies for unexpected issues such as disability, disagreement, divorce or death.

Rather than focusing solely on the business itself, it is important to look at family infuence and the probability of the family operating together to create and maintain wealth long-term. Shifting from a business focus to a family level of analysis provides a deeper understanding of a family business’s ability to create value for generations.

Family business enterprises must address not only the needs and expectations of the owners, but also the dynamics of the family. Providing advice about transferring family business entities and assets requires a thorough understanding of the different connections individual family members may have to the business, as illustrated by the Three Circle Model shown below.

Ownership

1 3

2

7

4 5

6

Family Enterprise

Role Common Examples

1 Family, neither owner nor employee Spouses; younger descendants

2 Owner, neither family nor employee Investors; third-party trustees

3 Employee, neither family nor owner Nonfamily managers; employees

4 Family-owner Founder; descendants of founder

5 Nonfamily-owner employee/manager Key executives and managers

6 Family employee Spouse of descendant (in-laws)

7 Family owner and employee Founder; CEO; other family employees

The Three Circle Model (adapted from Tagiuri & Davis, 1982)

Family Governance The underlying goal of family governance is to create a high performance, multigenerational team and ensure succeeding generations are participating in the business enterprise before their parents pass on. Governance is a multigenerational management process to ensure a family’s history, values and wealth extend for generations.

It is also a framework for communication and decision-making, and addresses how a family can defne and sustain itself for multiple generations. Family business enterprises grow in complexity from generation to generation as the number of family members increase and the family grows beyond one immediate family.

First Generation Family Business

Second Generation Family Business

(Sibling Partnership)

Third Generation Family Business

(Cousin Consortium)

It is important that family members acknowledge and abide by specifc shared family goals and values throughout successive generations. Families with the foresight to implement effective governance processes in the frst and second generations typically enjoy smoother generational transitions and fnancial success.

Planning a Successful Future for Your Family Business Enterprise 3

4 Planning a Successful Future for Your Family Business Enterprise

Research commissioned by BB&T Wealth identified the greatest roadblocks to being prepared for a business succession event. A random sampling of businesses valued between $1 million and $100 million and spanning a wide range of industries was included in the succession study. Family businesses were identifed as having more than 50 percent ownership within the family, having at least two family members in the business and having the intent to pass on the business interest and/or wealth derived from those interests to the family.

To create a framework for the family business study and to measure succession preparedness, six groups of factors were considered: owner characteristics; enterprise characteristics; family infuence; business formality; access to capital; and external environment. Eight questions were posed to the family businesses that participated in the study:

■ Is there currently a written ownership succession plan?

■ Has a successor been chosen?

■ Does the ownership succession plan include a time frame?

■ Has the successor been made aware of the decision?

■ Is the CEO increasingly delegating tasks to the proposed successor?

■ Is the successor ready to step in if unexpectedly required?

■ Are family members inside the business aware of the ownership succession plan?

■ Is there an active development plan for the designated successor?

When the answer was “no,” the score was 0. When the answer was “yes,” the score was 1. The cumulative score was 0 to 8. A higher cumulative score indicated a higher level of preparedness. Overall, study participants received an average score of 3.13, indicating a moderately low level of succession preparedness.

It’s important to note that succession planning is a process that must be managed over a long period of time. While the score could increase with better preparations, it also could decrease if necessary adjustments are not made in the succession plan.

Here’s a quick summary of the study results, listed by the six groups of factors. You may want to ask your close associates and advisors to assist you in answering these questions as you evaluate your succession preparedness.

It’s important to note that succession planning is a process that must be managed over a long period of time. While the score could increase with better preparations, it also could decrease if necessary adjustments are not made in the succession plan.

5 Planning a Successful Future for Your Family Business Enterprise

Owner Characteristics The intent to transfer the business enterprise to family and the intent to manage wealth together as a family across generations were found to be important predictors of how prepared a business was for succession. The survey results indicate that business owners should consider these questions:

■ Does the owner(s) intend to have the family manage the business entities for another generation?

■ Is there an intent to have the wealth derived from family business interests managed by the next generation of the family?

■ Is there clarity about the intent of the next generation to manage the business enterprise?

■ Is there awareness of the different options to transfer business interests?

■ Are there clear objectives about how the business enterprise should be transferred?

■ What is the leadership style of the family enterprise owner(s) and how is leadership being used to enhance or detract from succession preparedness?

■ What are the ideal characteristics of an enterprise leader?

Enterprise Characteristics Business performance, retirement timing, family members’ interest and organizational size are among the many factors infuencing succession preparedness from the enterprise perspective.

■ How long is the senior leadership generation anticipating working in the business enterprise?

■ What are the aspirations of the next generation?

■ Who else could run the family enterprise if an interim CEO was needed?

■ Are corporate results being benchmarked against industry performance on a quarterly basis?

■ What is your satisfaction level with corporate performance?

■ Do you know the value of individual business entities within the family enterprise?

■ If business interests are liquidated, how would the proceeds be invested?

As a business owner, you will fnd the answers to these questions helpful as you begin the process of developing a succession plan for your own family business enterprise.

6 Planning a Successful Future for Your Family Business Enterprise

Family Infuence Study results indicated that family cultures have a high impact on family enterprises. Understanding the family culture and family members’ views of the business help determine potential business transfer options.

■ Is there a family mission statement?

■ Is there a mechanism to allow family members to be heard and conficts to be addressed in their early stages?

■ How are family and business decisions separated?

■ Is there agreement about how family members are hired into the business and compensated?

■ How are shareholder expectations managed?

Business Formality

■ How is the next generation developing client relationships to continue to grow the business?

■ Which component of the Three Circle Model (page 3) has the largest impact on the other two?

■ How will the business enterprise be managed in the next generation?

■ What are the philanthropic goals of the family?

The level of formality of a family enterprise affects business longevity, business and family morale, and business value. It also impacts how attractive a business may be to a buyer.

Examples of business formality include having a clear mission, key management development plan, job descriptions, set compensation plans, career paths, a regularly updated strategic plan, documentation of business processes, a fully functioning board, organizational chart and employee manual. Other examples include having a current buy/sell agreement among owners, appropriately maintained corporate records, asset protection (entity selection and insurance), effcient accounting systems, appropriate HR function and use of analytics and benchmarking.

■ Does the business board meet at least quarterly, have an outside board member and require a succession plan?

■ What role does the board play in guiding the development of the key management team?

■ How is the business enterprise becoming more formalized in time?

■ Is there an organizational chart that shows what is needed for the business to run successfully without you as the owner?

■ Is there an up-to-date strategic plan?

■ Is the best business structure in place to protect assets and pass business interests to the next generation?

■ Are business interests protected from unexpected tragedies such as the death or disability of the key decision-maker?

7 Planning a Successful Future for Your Family Business Enterprise

Access to Capital A business’s access to capital and willingness to use that credit is important.

■ What is the rate of return on the business enterprise versus the cost of using debt for new opportunities?

■ Is there a rational basis for making decisions on whether to use external credit?

■ Is excess cash above that needed for normal operations regularly taken out of the business and invested properly?

■ Is the next generation developing relationships with external business credit sources?

External Environment Businesses operating in larger metropolitan areas are more likely to be prepared for succession. This is due in part to their having greater access to professional services that can help them with succession planning and greater access to talent who can help them formalize the business. Applicable tax laws also may affect succession plans.

■ Have you sought out the right expertise to help with succession planning?

■ Does the business enterprise transfer plan minimize estate, gift and income taxes?

■ Is there suffcient liquidity to pay taxes without being overly leveraged?

■ Is there a desire to equalize estate gifts among designated benefciaries who are involved in the business and those who are not involved; if so, is such a plan in place?

Conclusion At BB&T, we understand that when helping a family business enterprise, it is important to recognize that the family is the foundation for providing appropriate advice about various business interests.

Creating long-term generational value for the family may require a fundamental shift in thinking – evolving from “I’m making money so what I’m doing is working fne” to “I want to position these business interests to perform for my family and enhance our family legacy for the long term.”

The research provides a best-practices framework for family business enterprises to begin preparing a long-term succession plan to create multigenerational value. For more information on the study’s results and succession planning, please contact a BB&T Wealth consultant or your BB&T banker.

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