Succession planning should be a key priority for any business. However, succession planning is especially important in family businesses; where the future of the company, its assets, and control are being passed on to the next generation of a family. Family dynamics and emotion can make this process especially challenging.
 
In this post, we’ll delve into succession planning for family businesses. We’ll pose some fundamental questions family-owned companies should consider as they look toward the future, and tips for developing a sound and successful succession plan.
 
Key Questions
 
When preparing for the business to change hands one day, there are some critical questions business owners should ask themselves to help transition and inform the succession planning process. These questions include:
  • What is the financial status of the current owners?  First and foremost, they need to make sure their needs are appropriately considered. Many people are living into their late eighties and even their nineties.  This requires significant financial resources to accomplish.
  • Who will manage the business? 
  • How will the next generation be prepared for success?
  • How will ownership be divided? 
  • How will ownership be transferred?
  • Should the structure of the business be changed? (sole proprietorship, partnership, corporation, etc.) 
  • What needs to be done from an estate planning perspective?
Practical Tips for a Smoother Succession Plan
Be Proactive and Start Now 
A key element to success is starting early. Like other businesses objectives, incorporating a succession plan or exit strategy into the overall business plan is a smart idea. If you missed the boat on the business plan, all is not lost, as long as you’re thinking ahead. Planning five to ten years (or longer) ahead of the transition of ownership and control is highly recommended. Naturally, the further in advance you plan, the better. The more time, thought, and planning you put into the succession and transition plan, the smoother the hand-off will be and the more time you will have to execute the legal and structural changes that may be required to maximize the results for all.
 
One important expectation to establish early in this process is how you intend to transfer the company.  Will you gift the business to the next generation?  Will you sell it to them?  Are there financial resources available to help accomplish this (i.e. life insurance, trusts, etc.…)?
 
Make it a Family Affair 
If you operate a family business and are planning on handing the reigns to your family, they should be involved in and aware of the succession plan. Many family businesses fail due to conflict over ownership, roles in the business and estate issues, among others. Creating a strategy without the input of your successors is asking for trouble and is likely to result in discord. 
 
During this process, be sure to engage your family and consider their input surrounding goals and aspirations for the business.  Remember, you may have built or advanced the company, but the next generation will be charged with its future and growth – ensure they have a voice in the planning. 
 
Be Realistic
Perhaps a caveat to the prior point – be realistic. Avoid being so focused on family order and other traditions that you overlook the skills, capabilities, and interest (or lack thereof) of family members. Consider what is best for the business and its future in making decisions regarding leadership and roles within the company. If you determine that no one can operate the business after your departure, consider selling it. After all, passing the business along to a family member that is not capable of running it, will be damaging to all, including the family member that is put in a position in which he or she is not likely to succeed.  The profits from a sale can also benefit future generations of your family. 
If the next generation is capable but not ready just yet, there are options to keep the business in the family and pass along leadership authority later when the next generation is appropriately prepared and mature.  One can bring in an outside professional to run the business, actively prepare the next generation for leadership and, ultimately, pass along leadership to the next generation.  
 
Family business owners should also be realistic when it comes to ownership and shares of the company. Again, being married to ideas and traditions can be detrimental when it comes to the continued health and success of a business. This is true of the idea that each successor must all receive equal shares of the company. While this approach may seem to be the easiest or most “fair”, that does not mean it is the best business decision. Consider who will and will not be active in the business when making ownership decisions. Again, other options can benefit your family beyond full ownership and control, and creative solutions – such as voting and non-voting shares – can be helpful in complex family situations.  Additionally, family members that are not going to be active in the business can be treated differently than those that are in the balance of the estate assets, thereby still maintaining “fairness.”
 
Mentor and Train Your Successor 
The best way to ensure your successor understands his or her role and the operations of the company is to ensure he or she is properly prepared to succeed. Hands-on training should begin well before your departure from the company.  This might entail moving the future leaders through a series of leadership development positions in the company such that they become familiar with the various facets of the business.  This should include appropriate mentoring and coaching so they learn all they need to know to run the company.
 
This planning and investment will significantly increase the business’s chances of continued success and make for a much smoother transition. 
 
Build a Team to Ensure Your Success 
Professional service providers outside your business can be critical in ensuring a smooth and successful transition. Attorneys, accountants and other professionals can provide valuable input and advice in the succession planning process and should be consulted on important pieces of the plan.  If legal and financial element of the plan are not executed properly the consequences can be very costly.
 
Similarly, building a strong internal team, beyond the key family leadership, is also important.  Most businesses require more than just a strong leader or two to maximize their potential and capitalize on market opportunities.
 A Key Member of Your Planning Team 
At Lauber Business Partners, we understand what it takes to operate and transition a business. We work with small businesses and family enterprises every day to help them plan for the future and achieve their goals.
 
Contact us (414-273-8060 or info@lauber-partners.com) when you’re ready to look ahead and prepare to pass your company on to the next generation. It’s never too early to plan, and our experienced business professionals would love to be a part of your team. We have the skills and expertise to help maximize the transition and position your business for continued success.