University of Northern Iowa



Family Succession Planning

Posted on Thursday, September 20th, 2018

Across Iowa, we are experiencing a ‘silver tsunami’ of aging baby boomers. One area of our economy we
know this will affect is the changing of ownership in family-owned companies. It is well documented
that only about 30 percent of family firms make it to Generation 2 (G2) and a tiny 12 percent make it to
Generation 3 (G3). These transitions must be planned carefully and proactively to ensure the firm
So how do we do that?

Let’s consider a simplified five-step approach to help organize what can be a very challenging process:

1 Communicate Objectives/Goals/Timelines
The focus here is on “Communicate”. Existing ownership and the next generation must take the
time to think through their goals and priorities for how and when a transition will occur. This
needs to be an open conversation and forms the bedrock for the rest of the process.

2 Agreement on Strategic direction
Often we see G1 doing things “the way we always have” and G2 chomping at the bit to put their
own thumbprint on the firm. If done well, this inflection point can serve as an opportunity for
growth of the firm, as the best ideas from both generations are brought to the table. Of course,
the opposite can just as easily happen, creating a detrimental ‘tug of war’-- a point we often
discuss with clients at this stage of the process.

3 Transition of Responsibilities
In our work with family owned firms, this is where the rubber meets the road. G1 must be
emotionally and mentally prepared to give up the reins and G2 must be equally prepared to take
them. This takes time, often years to accomplish. G1 will need to determine the next
meaningful role for their life and G2 needs opportunity to get their hands dirty.

4 Valuation and Financing
“Fair” and “equal” do not always mean the same thing. This simple phrase is often where family
firms can implode. Having a third-party valuation can ease these tensions, especially for larger
families. Additionally, establishing a proper buy/sell agreement and keeping it current with an
attorney is an invaluable tool. There is no substitute for open dialogue, which includes siblings,
both in and out of the business, as well as spouses. Their voices and opinions cannot be

5 Communication to key employees and customers
There are other stakeholders to involve in the succession process and far too often, they are
overlooked or ignored. Making sure key employees and customers are aware of and support
the transition plans is crucial to success.
If you have noticed a communication trend, you are not mistaken. It’s critical to have open
communications to put key employees and other stakeholders at ease.  The next generation can stop
guessing at when Mom or Dad will hand over the reins; and it allows your advisors: attorney, CPA,
wealth advisor and banker, to work in concert to reach your goals.  Perhaps Generation 1 does not know

when they want to be done--after all, that can be a very difficult decision—as long as everyone knows
and isn’t afraid to talk about it, the process can still move forward with success.
In the absence of good communication, assumptions take their place. And that’s a place where few
firms survive.