For a family business, the transition from one generation to the next is perhaps the largest (and most overlooked) challenge it will ever face. The transition doesn’t just cause stress, controversy, and bruised relationships. Only 30% ever survive the second generation, regardless of industry, location, or the current economic landscape.
The transition from one generation to another is an issue of relationships and expectations of the family members and non-family numbers. The health and success of the business depend on careful transition planning and healthy communication. This means it’s wise to develop a Succession Plan as a fundamental part of your overall Business Plan.
The Succession Plan should be created at least five years before the succession takes place. Ideally, you should have one ready at all times to protect the company in case something tragic happens to the current leadership.
The Succession Plan should begin with a clear vision for the company, so everyone knows what to expect. It would be terrible for a hardworking manager to strive for an executive position, only to discover those positions are reserved for the owner’s children. A straightforward vision statement prevents this.
Your Succession Plan should confront these tough questions (and possibly others):
- How is the successor chosen? What skills does he/she need? How will this person be prepared to effectively do their job? Will the company educate the successors through classroom and on-the-job training? Is the successor prepared to work for the employee’s respect?
- Is succession to the family the best decision? Is the family better served by selling the business?
- How does the company move forward if no successor is available? Do you seek an IPO or private sale? Is the business liquidated?
- What is the transition trigger? What will it take for the owner to pass the baton to the next generation? A certain age? Meeting a specific goal? Is there a concrete deadline or transition?
- Is the owner prepared to relinquish control with a clean break? Will the previous leadership feel purposeless and use the family to claw back some control of the business?
- Is the business organized for a leadership change? Are processes standardized and documented? Have redundancies been established to prevent or overcome obstacles?
Regarding of your company’s finances, the Succession Plan should strive to minimize estate and gift taxes using life insurance, trusts, family partnerships and other wealth transfer strategies. Here is where you’ll need to involve your accountant and attorney.
When the time comes, it’s helpful to put someone in charge of the transition. This should be someone objective whose job is to ensure the Succession Plan is followed the company continues to operate smoothly. Depending on the size of your business, this may be a team of people.
Change is never easy, so it’s helpful to extend the succession process over several months or even years. This will give the successor time to gradually take the reins from the retiring leader and acclimate the other employees to the new arrangement.
When you finally have a Succession Plan in place, your job isn’t done. Your plan should be an evolving document that you adjust depending on changes in the market, the capabilities of the company, or the competitive environment.
If you stick to your plan and keep egos aside, you’ll be able to make a smooth transition.
Commercial Lender, Vice President, Director of Business Services