Many family-owned businesses lack any form of succession plan. This is a recipe for disaster that could lead to family disagreements that escalate to litigation and harm to the effective operations of the business. Do not make this mistake. Begin planning today.
If you have a family-owned business, one of the keys to help ensure the business thrives for years in the future is to have a detailed, specific succession plan in place. Why? Because there will come a point in time where you, as the owner, will want to retire or you simply will not be physically able to continue in your leadership role. With a sound succession plan in place, the leadership transition can be completed smoothly and efficiently to ensure the actual operations of the business are not disrupted.
Despite the various benefits of having a succession plan in place, a shockingly high percentage of family-owned businesses have no plan in place. For example, according to a 2016 Family Business Survey from the National Bureau of Economic Research Family Business Alliance, approximately 43 percent of family-owned businesses lack a succession plan.
The challenge? For many business owners, succession planning is difficult because it is invariably intertwined with the complexities and emotional dynamics of a family relationship. In many instances, no matter how accomplished or experienced the children may be, there are oftentimes questions about whether the child of the original owner is capable of taking over and running the business effectively.
Despite the reluctance some business owners may feel about deciding whether one of their children, or other family members, should take over the business, it is critically important to have a succession plan in place. If you continue to neglect succession planning and something happens where you become incapacitated or pass away, the business could be jeopardized by family squabbles, unnecessary litigation, lack of direction, lack of leadership and other issues.
Here are some tips for effective succession planning:
1. Start planning early
It is strongly recommended that you begin planning as early as possible. For example, many financial and business advisors recommend giving yourself at least 10 years to properly plan for succession. Why? Because there are so many issues have to work through, such as estate planning, tax ramifications, voting rights, ownership stakes, etc.
In addition, the sooner you begin succession planning, the more time you give to your chosen successor to learn the proverbial ropes, including important management tasks. This then enables you to see how well they're executed and how well they handle a management role in the business.
2. Create a dialogue with family members
Obviously, when selecting a child, sibling or other family member to take over your business, there are emotional and familial dynamics that need to be considered and respected. You should be proactive in addressing any “family landmines” by creating a dialogue with your family. Be transparent and allow them to provide their input as well. This will help reduce the risk of a “surprise” decision that could anger or disappoint family members thereby reducing the risk of unnecessary litigation or other issues down the road.
3. Have realistic expectations
You may have a pre-conceived succession plan in your mind where your first-born child is eager to take over and embraces running the family business. However, what we hope and envision in our minds may not translate into reality. For example, if your first-born child does not have any business skills or even an interest in taking over the business, it is important to face these realities head-on and re-evaluate your options.
4. Make sure your decision is best for the business
Succession planning needs to be as objective as possible. Simply selecting your first-born child because they are your first-born child is a recipe for disaster (as mentioned above). The individual you select to take over the business should have the requisite skills and interest to be an effective leader.
5. Integrate your succession planning with estate planning
It makes sense to integrate your succession plan with other forms of long-term planning, such as your estate plan. Why? Because having a well-coordinated and strategic set of plans in place will ensure both the daily operations of your business are not disrupted and the transfer of your hard-earned assets goes smoothly.
6. Establish a professional development and performance management protocol for family members in line for leadership positions
A prudent way to avoid the bad optics associated with providing an arbitrary promotion to a family member is to put them through a rigorous professional development program so they can hone their skills. This program should also include routine performance assessments and feedback so the family members can identify issues and work to improve.
7. Consider hiring an advisor or consultant to assist with developing your succession plan
As mentioned, there are a litany of issues associated with an effective succession plan. This is why it may make sense to reach out to lawyers, accountants, financial advisors and other professionals who can assist you in putting together your succession plan.