When you run a family business, you may dream that one day your children will take over and run the company. However, nearly half of business owners over the age of 65 don’t have a transition plan in place, which could jeopardize plans to pass the business down to future generations.
Lack of a formal succession plan can lead to problems when it’s time to retire, but with advanced planning, honest conversations and a documented plan, your transition out of the business could be smooth sailing.
How to create a successful succession plan for a family member
Analyze the state of your business
As a business owner, you probably have a general idea how your business is performing. But before creating your transition plan, take a good hard look at all aspects of your company, including how it operates, who your vital customers are and where the value lies. Review your financial statements and future projections to identify any coming problems that you need to plan for.
You may also want to ensure that any business obligations are reflected in the business books. If you’ve taken out any personal loans even thought about incurring debt to help finance the business, see if you can transition them out of your name. If you loaned any of your personal money to the business, you’ll also want to make sure that is appropriately reflected in the financial statements.
Get outside advice
You aren’t the first owner in history to pass down a business to a family member. Getting an outside perspective from someone who has gone through the process can help you think through things you might have missed. Ask them questions about their experience, how and why they made certain decisions, and if there is anything they would do differently.
Their business and situation may differ from yours, but understanding their experience may help you develop a thoughtful approach to your unique situation.
Name your successor
Naming your successor could be a fairly easy task if you only have one family member who is both interested in and capable of running the business. But when more than one person wants to head up the family business, deciding on your successor will probably require a lot of additional thought.
You’ll need to consider who is interested in running the business and who is qualified and capable to take the reins. Required skills should go beyond basic job competence and include efficiency in leadership and people management. Consider bringing in other advisors to help you evaluate your successor options. They may be able to help you see the candidates’ different strengths and weaknesses so you can make an unbiased decision.
Create a transition timeline
Turnover over your business is not a one-time transaction; you’ll want to start planning for this years in advance. Give your successor increasing responsibility and start bringing them into management decisions early. Treat the years before your retirement as a lengthy training program for your successor, to give them the best possible foundation in the family business.
Once you’ve taken the time required to adequately prepare your successor for the role, create a plan for how and when your role within the company will eventually phase out. You might start working less for a period of time or decide to take an advisory role as you transition out of the business.
When you create your timeline, be sure to write out the formal plan and communicate it to stakeholders. According to a PwC survey, only 23% of family businesses have a documented transition plan. Map out that transition timeline and plan so everyone knows what to expect during the transition years.
Find career development opportunities for the successor
There are a number of reasons that you’ll want a well trained successor taking over the reins of the company. One reason is that you want them to have the confidence and competence to approach any situation that arises. What do they need to learn before the transition completes? That may mean sending them outside of the company to receive formal training in a specific topic. Or, that could mean working within a certain department in the company for a time to understand how critical functions work.
Another reason that you want your successor to have spent time focusing on career development is to demonstrate to non-family employees that the new leader has been held to high standards. When non-family employees can see that the new successor has spent time getting the training needed to be successful in their new role, it can help them believe in the new leadership that’s taking over, seeing it as an earned position instead of nepotism.
Get paperwork in order
Handing over your company to a successor is a legal process, and it can take time to do it right. Work with a lawyer to ensure that the paperwork is in order and you’re taking all of the steps necessary to transfer ownership, depending on your business structure.
You’ll also want to work with your CPA early on during transition planning to understand the tax impact of a family transition. When brought into the transition planning conversation early, they may be able to help advise you on ways to minimize your tax liability.
Keep an open mind
Handing over control to a successor can be a challenge for someone who has devoted decades to growing and running a business. They may make different choices than you would or they may have new ideas that they are interested in pursuing. According to a Deloitte survey, 80% of next generation family business leaders say that their leadership style will be different compared to the previous generation and 56% say they will change the family company’s strategy.
These changes may be difficult to watch. But if you have taken the steps to ensure they are trained and educated, know the business well, and are invested in seeing the company succeed, you’ll have more assurance that the decisions they make are in the best interest of the company.