What happens to a family-owned business when the owner dies?

More than half of U.S. small businesses are owned by people over the age of 50, according to the Small Business Administration. So you’d think they would be planning for what happens when they can no longer oversee their businesses. Yet Global financial services firm PwC’s 2021 Family Business Survey found that only 34% of U.S. family businesses “have a robust, documented and communicated succession plan in place.”

This is a big problem. According to the PwC study, businesses that aren’t planning for succession could be vulnerable to significant risks such as “fractured family relationships, a successor who doesn’t have the capability or credibility to lead, and reluctance from external stakeholders, who may not want to work with an organization that isn’t governed by a good succession plan.”

It can be challenging to carve out time to think about the future when there are so many issues to deal with today. But it’s critical.

Peter Latta knows this. He’s the chairman and CEO of A. Duie Pyle, a West Chester-based transportation, supply chain and logistics firm that employs more than 4,000 people, including multiple members of his family from three generations. Latta, who is in his mid-60s, has spent a great deal of time over the last few years formalizing his company’s succession plan. Along the way, he has had to make some tough decisions.

One of the decisions had to do with involving outsiders in his company. He’s found that bringing on people who are not family members or shareholders to help run the company or sit on the company’s board is a powerful way to offset competing interests and avoid disputes. A. Duie Pyle not only has many senior leaders who are outsiders, but also several independent board members, and the company’s family owners have given this team the authority to manage.

“A really important aspect of family-owned businesses and sustainability is that there’s a clear understanding of the respective roles of owners, of directors, and of leadership and management of the company,” he said. “If family members don’t respect those guardrails, then it can create a lot of frustration. You’re not going to keep good independent directors and leaders if you have owners stirring the pot.”

Matan Shmuel, a Center City-based business lawyer and adviser, agrees about getting outsiders involved but tends to lean toward elevating internal people for these roles.

“Bringing someone from the ranks to help run a family business is usually better,” he said. “I’ve found that the relationship dynamic is going to be stronger. Bringing in an outside CEO may be giving the impression that a family member isn’t good enough, and some may walk away.”

Another tough decision is creating formal policies for family employment. This may mean limiting what family members can do within a business until they have the right amount of experience, both inside the company and working for others. A. Duie Pyle has a written employment policy and requires that family members work outside the company for a certain period of time. Shmuel also agrees with that approach.

“When you’re ‘home trained,’ your mindset is narrowed,” Shmuel said. “But when you’re trained by other organizations, you bring new perspectives to your family business that would not otherwise have been discovered.”

Implementing these rules is easier said than done. As we all know, family-owned businesses can be very susceptible to family-related arguments. Many companies choose to involve outside coaches or advisers to help facilitate tough conversations and decision-making.

“You’re never going to get rid of the childhood petty fights that manifest in adulthood and could sabotage and tank the business,” Shmuel said. “A good coach or adviser that all the parties mutually choose can help mediate compensation questions or strategic business decisions, as well as give good practical advice.”

One of the biggest mistakes owners make in their succession planning is ignoring the paperwork and tax implications that need to be regularly reviewed and updated. That means meeting with outside lawyers to make sure that estate plans and wills are current and reflect the intentions of the business owner as well as being consistent with corporate buy-sell and partnership agreements.

Another factor is taxes. Besides federal taxes, Pennsylvania, New Jersey and Delaware all have separate rules regarding inheritance taxes, as well as amounts that are eligible for annual tax-free gifts. To ensure that assets — which include the shares of a company — are to be handed down to future generations with a minimal tax cost, it’s important to make sure there are trusts and other measures in place. Business owners should regularly review all documents.

Most important, a good succession plan should be a formal, written governance policy that is compatible with the values of its founders, family members, employees and current leadership and can be followed by everyone going forward. It won’t be perfect, but for Latta it’s the best way to resolve inevitable conflicts.

“A formal governance plan can really help mitigate future risks and the compatibility of values is, I think, probably the greatest lesson I’ve learned,” he said “You can’t just kick the can down the road and hope that everything will work out. Because it won’t. It’s about planning and stewardship and being humble and looking out for the best interests of your employees and their families.”