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Running a family business will be an exciting and rewarding experience, but it might probably also come with a variety of challenges. Your family’s business may have survived the high risk of bankruptcy that hangs over the average small business, but you are not necessarily secure yet. Just 30% of family businesses moves from the founders to the next generation, with only 12% of them moving on to the third. If you would like to see the positive side of those numbers, you would like to start planning for succession almost as soon as you begin or acquire your enterprise.
This process requires transparency and honesty, starting with a query so basic that it may appear obvious. But as many have learned too late, trouble begins when you let something go without saying a word.
Do your kids even want this business?
I know entrepreneurial families who never discussed succession until the founders retired – and only then did they learn that the children didn’t want to take over. I had a friend who did printing. Over the course of 30 years, the husband and wife have built a successful business that features over 20 employees, two locations and real estate. When it got here time to leave, my friend said his son, who had been in the industry for almost 10 years, would take over the company. After further conversation, he realized that he had never asked his son if this was what he wanted. Come to discover, his son didn’t want to be a business owner. He saw the stress and impact it was having on his parents and family and decided it wasn’t for him. My friend had to come up with a recent exit plan at the last minute.
Unfortunately, for a founder who dreams of building a legacy for a long time to come, this scenario is becoming more and more common. Just as Millennials and Generation Z often hand over on their parents’ antique furniture and collectibles, many of them hand over on inheriting their businesses. I think this explains the low rate of generational succession in family businesses greater than financial or management problems.
Just look at how in another way generations have managed their careers. While baby boomers have stuck to one path throughout their working lives, Gen Xers have taken several detours. Millennials and Generation Z are completely off course (if they had a specific track to begin with), so getting one of them to commit to running a family business for life shall be difficult.
If you propose to pass the company on to your child or other descendant, you can not assume that they will take it over and do it voluntarily and not out of a sense of obligation. You cannot assume that your kids want to take control; you would like to allow them to know this is an option for them.
On the other hand, I recently talked to a second-generation owner who has been working with his father for ten years and is about to take over the company, but still doesn’t know the plan because his father hasn’t shared it with him. In this situation, we instructed the second-generation owner to talk to the father about the details of the initial phase. These details included the value of the business, the expected advance payment the son would have to pay to the father, details of ongoing payments and advantages to the father after his passing, and a transition and handover plan. Even if members of the family have the best intentions when making a retirement decision, these details may cause anxiety and arguments, so it is best to start the process with a clear and detailed plan.
Once all parties are clear about keeping leadership in the family, it is time to create a plan. Here are five suggestions that I have personally found to aid you create a successful succession plan.
1. Be fully transparent
A successful transition depends on transparency. The recent management board must know the company’s current financial condition and future projections. There could also be legal issues, unaccountable contracts with employees, or other issues they have no idea about. All of those conversations – the good, the bad and the very ugly – need to happen during the succession planning process. When people don’t have these discussions, it changes the entire family dynamic.
2. Meet with a succession planner
The first step is to engage a business analyst who will assess the company and propose strategies for transferring it to subsequent owners. A family business advisor can aid you deal with the often emotional issues that come with family ownership. Your advisor will guide you thru these difficult conversations and then bring in additional experts, akin to tax and real estate specialists.
An advisor’s first step could also be to take the intended successor for an honest conversation: Is this what you would like to do? Can you discover passion and purpose in it and have fun? If the answer is yes, it is time to get to work.
3. Set your timeline
Start with an agreed succession schedule. Ideally, this period should cover 4 or five years before the transfer. Clearly and directly define everyone’s roles, what they shall be responsible for and when their responsibilities will begin. When will the current leadership step down and how will their successor change?
The schedule should include financial dates akin to valuation, payment schedules and capital release. Decide whether the second generation will buy 100% of the company on day one or whether the purchase shall be spread over several years.
4. Have a backup plan
You should at all times have a plan B, especially when it comes to family succession. If your son becomes CEO after you, is Plan A, and tells you he’d fairly go into the arts, that is probably a sign he won’t thrive as a CEO. Who or what is plan B? This may very well be one other member of the family or even someone outside the family.
5. Consider selling as an alternative
Even if your son or daughter is willing to take over the business, financial considerations may preclude this. What if you built a phenomenally successful business price tens of millions? Not only will you pass the company on to your successors, but will they have access to the money needed to purchase it? The wisest solution could also be to sell the company for full value.
Passing on your loved ones business may fulfill your legacy dreams, but if the next generation is not ready or interested, your legacy will only be tarnished.
The best tool for transition: conversation
It is good for many people to sit down and discuss all these issues. The best family transitions I’ve seen happen when the second generation starts working in the company very early on so they have an idea of what day-to-day is like, fairly than being thrown into the company like their parents were preparing to leave. One of the best examples I’ve seen is that of a respected founder and CEO whose sons and nephews began working at his company very early on. One worked in the franchisee’s office selling signs, others interned and all went through the basic sales department. Now that they each have nearly a decade of experience in the organization, they have been elevated to leadership positions. The experience gained through the profession ladder gave them a full 360-degree view of the entire company’s operations and respect for the role of each person. This made them much higher leaders and followers than if they had entered later in their careers.
If you know from the starting that your descendants would like to do something else, you have time to find the right person to proceed what you worked so hard for.