Plan to Transition the Family Business

provided by James McArthur, Sanibel Captiva Trust Company Senior Vice President, Family Office Services

James McArthur. Photo provided

Many family business owners contact The Trust Company for assistance as the future approaches and it is time to consider exactly how they will transfer their precious business into the hands and control of the next generation. As closely held family businesses expand over time, the needs of the families relying on these businesses are expanding as well. Growth of a business is often viewed in linear metrics — revenue and profitability. However, families can expand exponentially through generations. Such a dynamic creates demands that significantly impact culture, performance, and decision making, punctuating the need for a succession strategy that aligns the family’s intentions, goals, and cash-flow requirements through multiple generations.

Protecting the longevity of a family business is essential to our global and U.S. economies. Family-owned businesses account for roughly 80% of all companies world-wide and approximately 78% of business entities in our country. According to the 2021 Family Enterprise Business Survey, approximately 40% of U.S. business owners actually have a succession plan in place and of those families, only a third believe their plan to be sufficient in terms of documentation and communication. Yet the survey revealed that many founding generation’s children do not understand the fundamentals of the business including long-term goals and intentions. Nor are their financial priorities aligned between first and second generations.

For the business to support multiple generations, three key elements need to be managed throughout the life of the company: Growth, Cash Flow, and Control. Ample growth will maintain and increase valuation. Sufficient cash flow will enable owners and family members to support lifestyles. Control preserves the owner’s ability to make decisions without the influence of non-family stakeholders or creditors. Environmental changes such as in politics, labor markets, generational behavior, technology, and regulation are occurring at such a rapid pace that simultaneously maintaining growth, liquidity and control may be challenging.

A well-structured succession plan will go a long way in terms of mitigating the risks of swift changes in our economic landscape. The blueprint for a family business’s long-term strategy begins with four pillars:
• Owners – determine the mission and define success
• Governance – A board of directors directs the business as well as manages the chief executive
• Management – recommends strategy and operates the company
• Family – maintains and develops unity and core values for the next generation

Each pillar is tied to the other with family members creating the link. Management and leadership roles will vary and overlap to ensure that a good decision-making process is in place. When a family business experiences issues, most often it stems from a lack of governance and communication.

As the family works through the planning process, the overall mission and purpose of the business should be assessed by the fundamentals: Why does the business exist? How will the company grow to support multiple generations? Are current family members qualified and willing to lead the business? Is the current ownership structure appropriate and how will ownership be passed down to preserve capital and family control?

Often, fiduciary partners are called upon to assist family-owned businesses and family offices in planning for the transition to the next generation. When choosing a partner, the criteria of competency, experience, depth of talent, and continuity are important. Trusted advisors that invest time to learn the family’s history, intentions, goals, and priorities will be vital to ensure a smooth transition of leadership and ownership for years to come. We specialize in this at The Trust Company and are here to assist you.

The Sanibel Captiva Trust Company is an independent trust company with more than $3.2 billion in assets under management that provides family office and wealth management services, including investment management, trust administration and financial counsel to high net worth individuals, families, businesses, foundations and endowments. Founded in 2001 as a state-chartered independent trust company, the firm is focused on wealth management services that are absolute-return oriented and performance driven. Each portfolio is separately managed and customized specifically to the client’s yield and cash-flow requirements. The Naples Trust Company and The Tampa Bay Trust Company are divisions of The Sanibel Captiva Trust Company. Offices in Sanibel-Captiva, Naples, Marco Island, Tampa, Belleair Bluffs-Clearwater and Tarpon Springs.

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