Business owners are often consumed with the day-to-day demands of running their business. As such, it may be tough for them to spend adequate time thinking about the possibility of selling or passing the business to the next generation – until something changes in their circumstances or they receive an unsolicited offer.

The best way to help increase the likelihood of a successful transition for a business is to start planning well in advance. Even more critical for a positive outcome is to explore not only the practical implications of a sale, but also the potential emotional impact on the owner and family whose identity is often tied up in the business.

Succession planning is only one facet of a transition. For the business and the family to thrive, a broader approach is needed – one that considers the entire family enterprise,¹ both with and without the business.

Successful transitions are grounded in a process that broadens the conversation from succession planning to also include continuity planning.² This wider lens recognizes the complexity of family businesses and families that own businesses. It encompasses the lives of each family member, the family’s philanthropic efforts, the business and its employees and the community in which the business operates. This approach can contribute to more successful outcomes for the business, the family and the employees.

Studies have found that three out of four business owners who sell “profoundly regretted” it one year later.³ This regret came primarily from personal reasons (e.g., not having a plan of what to do post exit to stay relevant and engaged) – not financial reasons. A focus on continuity planning, with a thoughtful plan for leadership, management and ownership, along with having some meaningful engagement to transition into, can help minimize that potential for regret.

Getting started: A storytelling exercise

Even if a business is years away from a transition, creating a forum for intentional conversations about the future can foster deeper insights about where the family is and where they want to go.

It could be helpful to work with a trusted advisor as a facilitator. With a facilitator, the business owner, family members, key employees and other stakeholders can pursue a thoughtful exploration of possible outcomes for themselves and the business.

An exercise known as a pre-mortem and pro-mortem, which borrows from the work of cognitive psychologist Gary A. Klein,⁴ can help all the stakeholders identify what a successful transition would look like, as well as potential obstacles and pitfalls.

During this exercise, the facilitator asks each person to tap into our natural ability to tell stories that have “already happened” and imagine looking back at a sale or succession from a point five to 10 years in the future and to consider the best and worst possible outcomes.

• For the pre-mortem, picture a transition that went badly for the business and for them personally. What went wrong? Where is the business as a result? Where are they and where is the family? Then, list every possible reason: How did that happen?
• For the pro-mortem, picture a successful transition with a positive outcome for the business and themselves. What went right? What do their lives look like now? How is the business doing? And what were the reasons for that success? Again, list every possible reason: How did that happen?

Comparing notes and mining for insights

Once each stakeholder has completed the exercise independently, the facilitator gathers everyone together to compare their responses. The goal is to look for insights and commonalities about what success and failure might look like.

This process can also help uncover any significant divergences in desired outcomes. For example, if the business owner wants to use the proceeds of a sale to invest in a new business but the spouse envisions having time for travel and relaxation, it’s better to know that in advance so they can work on a solution that works for all.

By engaging in this conversation well before a business transition is imminent, a business-owning family and their key employees can create a blueprint of business and personal risks to manage. They can identify opportunities and avenues for fostering positive outcomes for the company and stakeholders, as well as each family member.⁵

Taking an integrated approach to succession planning

While the pre- and pro-mortem exercise is an important aspect of continuity planning, so are the nuts and bolts of succession planning. Armed with the insights gained from the storytelling exercise, the owner, family and employees are better positioned to address the tactical planning questions, including:

For the business

• What is the business worth today?
• Are there ways to build additional value before a transition?
• Is a sale or a family succession the best approach?
• If the next generation will take over, do they intend to alter the business model, and if so, how?
• Will the employees be taken care of by the new owner(s)?
• How will new leadership affect the customers and the community?

For the family

• What will the next chapter look like for the owner – where will they find meaning?
• How much income does the family need to fund its lifestyle?
• What sources of income will be available to the family after the transition? And what additional expenses might the family be taking on that previously were borne by the business?
• What are the family’s longer-term financial goals?
• What are the senior generation’s estate planning wishes?
• How can the sale be structured to minimize the impact of taxes on the proceeds?

In addition, it is critical to put together the right team of professionals to help navigate a transition, and to get help reviewing the above questions. This may include a financial advisor, certified public accountant, estate planning attorney, business valuation expert, insurance advisor, investment banker, business broker and family governance consultant.

Business transition can happen at any age and life stage, for expected or unexpected reasons. Every transition is unique, and will require a customized strategy. But being prepared – especially for an unexpected transition – may be the difference between success and failure.

The importance of balancing succession planning and family governance

While planning is always important for building and preserving wealth, it becomes even more critical when a family’s wealth is in the form of a business. A plan that focuses too narrowly on the financial aspects may not create optimal results. Conversely, an aspirational vision of the future that lacks the right team and tactics will be unlikely to come to fruition.

By using an integrated approach that balances succession planning and family governance, a business-owning family can minimize negative surprises and increase the likelihood of achieving the ideal end state for each member, as well as the business, the employees and the community.

We can help

A J.P. Morgan advisor can offer guidance and, along with other professional advisors in your team, to help you formulate a robust succession plan.