How do I transition my family business?
As the old proverb says, "Failing to plan is planning to fail," and this is especially true if you want to hand your family business on to the next generation. As explained in part 1 of this article, lack of planning is the primary reason founders fail to successfully pass down their business. In this article, we’ll discuss the elements that go into creating a succession plan.
If you’re an entrepreneur putting in long hours operating your business, you may think you don’t have time to set up a succession plan (it can wait till things slow down!) but you never know when health, an accident or economic conditions will suddenly make it necessary to initiate a plan. Think of it as life insurance for your business, and take the time to create a plan to ensure your company’s survival.
Begin with the end in mind.
Does your business already have a strategic plan with a mission statement and short- and long-range goals? If not, sit down with key family members and make those all-important decisions. First and foremost, does the younger generation want to take over the business? If so, do they want to manage it or just retain ownership? Once that’s been decided, you can move on to other questions, such as whether you want to eventually expand to other locations, franchise your concept, or move into other product lines.
Get expert help.
You may be an expert at running your business, but you’re not a professional at setting up succession plans. Paying an outside advisor or consultant is a wise financial investment; they can help you save money in the long run by avoiding potential land mines that can blow up your plan. They can also provide an objective assessment of your long-range plans and help family members reach agreement if you’re not all on the same page.
Develop a financial exit strategy.
Are you expecting family members to buy you out when you step down, or to buy the business from your heirs after your death? If so, do they have the money to do so? If not, how would the company be disposed of and how would the proceeds be divided? Would you rather keep your shares in the company and draw an income from the profits? These questions should be discussed as soon as possible with your succession planner, your financial planner, and your tax attorney.
Choose your team.
A good succession plan identifies not only who will inherit the business (through shares of stock or a partnership), but also who will manage its day-to-day operations. Don’t worry about deciding too early you can always modify the plan later. If none of your heirs are qualified to manage the business, or if they just don’t want to, look around at the long-time employees who’ve been loyal to the company and who know it inside and out. Let them know that they’re valued and that you want them to stay with the company even if you’re not around.
Groom your successors.
Are your heirs prepared to take over the company? Have they been trained in the technical end of the business as well as the management side, including budgeting, human resources, marketing, etc.? If not, it’s never too early to start. Make sure they have the training they need, then give them responsibility and see how they handle it. Let them make their own decisions and use the consequences, good or bad, as learning experiences.
Plan for disputes.
No matter how well family members get along, they are individuals with their own goals and plans and unique personalities. Some may be comfortable with taking risks and starting new ventures, while others are more cautious. They may have varying degrees of commitment to the business from viewing it as a sacred legacy, to seeing it as a source of funds to support their lifestyle. Conflicts will inevitably occur. A good succession plan sets up mechanisms to deal with disputes, including provisions for one party or group to buy out the others, or to sell the company and divide the proceeds if an agreement can’t be reached.
Know when to say when.
Once you’ve set yourself up for success by developing, updating and implementing a succession plan, realize when it’s time to step down and let the next generation take over. Pick a retirement date and stick to it. Give advice if asked, but don’t micro-manage the company after you’ve officially left. You’re not helping the new managers if you second-guess their decisions and undermine their authority. Mistakes will be made. You made mistakes when you were starting out, and that’s part of learning any business, so relax, find other pursuits to keep you busy, and enjoy your newfound freedom. You’ve earned it.