We often talk about a lack of succession and estate planning among family business owners, but perhaps the real issue is a lack of communication about those plans.
The “Second Annual Private Business Owner Survey” by Brown Brothers Harriman shows most family business owners have estate and succession plans in place (or, at the very least, in mind) — but far fewer are willing to share them with their families.
The survey drew responses from 400 U.S. private business owners whose enterprises generate revenues ranging from $50 million to $500 million-plus.
According to the BBH report, while 99% of respondents said they have taken steps to prepare the next generation to take over, 74% admitted that roles for those NextGens were either not well defined or not fully communicated.
Scott Clemons, partner and chief investment strategist at BBH, says many family businesses operate under what he calls “constructive ambiguity.”
“It's like, ‘This thing kind of works. We're not entirely sure how it works, but everyone knows what their place is, and I've got a lot more on my to-do list than to try to turn that ambiguity into something a little more precise,'” he explains. Most family business owners understand the importance of succession planning, Clemons notes, but they often fear that formalizing the process might lock them into decisions they will later regret.
Similarly, while 100% of the survey participants said they have an estate plan and 91% said their plan is aligned with their values, 97% noted that they had not communicated their estate plans to family. The top two reasons given were concerns around whether their plan is optimal and discomfort with the potential emotional fallout from communicating their wishes.
Clemons says these findings highlight the difference between ownership and management. “In its strictest sense, an estate plan is about ownership of an asset,” he says. “And I think in the minds of a lot of business owners — maybe this is the constructive ambiguity again — the issues of ownership and management are kind of blurred.”
So, for example, a family business owner might be reluctant to reveal their estate plan to the family because, unbeknownst to several ambitious NextGens, the owner has their eye on a potential non-family CEO.
“That's a management challenge more than an ownership challenge,” but that distinction isn't always clear, Clemons says.
“I think you see in the survey there's a real desire that ownership stay within the family, so you can solve for that. But solving for that may mean bringing in external management.”
Indeed, 91% of respondents said it's important for their business to remain in the family for the next generation, but 29% said they are still struggling to pick a successor.
Meanwhile, 36% of those surveyed said they have faced the challenge of family members having differing values related to the company's mission — another complicating factor hindering conversations about estate and succession planning.
But Clemons says this perception of a values clash may itself be the product of communication gaps among generations.
“It's easier said than done, but what we try to do is to talk to business owners about the difference between values and preferences,” he says, explaining that preferences are the ways in which different generations choose to express a family enterprise's core values. He cites the example of a family business founded on values around corporate philanthropy coupled with strong faith-based messaging. While the next generation may not feel as strongly about that messaging, they can still uphold the family's core values by continuing its philanthropic efforts.
“I think the older generation has to be more patient and understanding that a younger generation may pursue the same values, but express them in different ways.”