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Strategizing Succession: Key Considerations for Your Family Business
Succession planning is a lengthy process that can take anywhere from one – two years to complete and in the case of a family business, it can take as many as ten, depending on the company's size and complexity. Creating a succession plan is a proven way to help minimize turbulence while transitioning the business from one generation to another.
If you’re like most entrepreneurs, your family business isn’t just a job – it’s your passion. That’s why you’ve invested so much time and effort into growing your business. Now that retirement is on the horizon (or no longer an abstract, way-in-the-future thought), you’re turning your attention to the next steps. More specifically, it’s time for a succession plan.
Succession planning is complex and as mentioned the transition process could take years. Let’s look at some key considerations so you can begin strategizing now and construct a plan that’s right for you, your family; and your company.
All in the family
For a minute, we’ll put aside the business aspect of succession planning and focus on the family aspect. Mixing work and loved ones can be tricky, especially when it comes to naming a successor to the family enterprise. Among the next generation, who gets the inside track to lead your business? Is it, by default, the oldest child? The one who exhibits the best leadership skills? The one who’s most interested in your business or is in a certain role that lends itself to taking over? Quickly you can see why succession planning in a family business can take upwards of 10 years, it might take some good just to realize the true potential that lies within the family. Filter out who is interested in taking it over, and can they be groomed to achieve success at it. These are not easy transitions. Business and personal collide in these scenarios and often these are very tough conversations and decisions.
There’s no automatic “right answer” since all family and business situations are different. What’s universal, however, is the need to give everyone their say and then, once you’ve arrived at a decision, communicate it clearly and logically. You might not achieve consensus – and some feelings could get hurt – but you’ll earn respect for transparency. While family harmony is desirable, of course, you’re also wearing a business owner’s hat and must ensure the continued strength and viability of your company.
Going outside the family
Don’t assume a family member will take over the business. Maybe none of the next generation works in your business, is interested in leading it, or is qualified to take over. Another option is for a current employee to lead the company. Once you’ve identified a good candidate, be sure to let them know – in as much detail as possible – what the leadership role entails. Again, explain this decision to your family and encourage questions. Every step of the way, open communication can align everyone’s interests and expectations, and helps minimize conflict.
Regardless of whether the leader-to-be is a family member or other employee, build a comprehensive, goals-based development plan (attached below) to position them for success. Document the key responsibilities you face (both regularly and ad hoc), and train the future leader to handle those duties. Be open minded and seek input on where they see potential for improvement in organizational processes, business culture, company structure and avenues for growth. Everyone has different perspectives, and fresh insights could take the business to the next level.
The ultimate goals of the Succession Planning Process are to ensure that, at handover:
- The old leader is ready, willing and wanting to move into a new role/new life.
- A new leader is ready, willing and able to take over the top job.
- The family and business are happy about, and willingly support, the transition.
- All other interested parties are fully informed, and supportive of, the change.
Businessinsider.com
Navigating finances
The financial side of succession planning can get complicated if you have more than one child, each with varying degrees of involvement in the company. If the family business spans generations and also involves extended family (e.g., cousins, nieces, nephews), the complexity increases. The owner(s) must determine the best – and most fair – way to transition the business and allocate assets. When selling to a third party, will family members remain involved in the business? If so, in what capacity?
Whether the business is sold to family members or a third party, your selling price should reflect fair market value. For many owners, their business represents their largest investment and biggest source of retirement income. Don’t shortchange yourself by discounting the sale price – even if selling to your own children. Don’t forget what made you successful in the first place. Chances are, nothing was just handed to you when you started, and look where you are today!
Given the challenges of succession planning, it’s typically wise to consult regularly with your advisor and related professionals, such as a lawyer, business exit strategist, and tax and estate specialist. As always, don’t wait to have these conversations. The most appropriate time for these planning conversations to happen is ASAP. You can never be too prepared for succession planning. Retiring on your terms and timelines is the most ideal scenario, however from now-to-then anything can happen! It’s important that we plan for the just in case also. In financial planning, there is no such things as being over prepared.