When my grandmother died she didn’t have a whole lot of valuable possessions. That did not stop my uncle from trying to take advantage of my father. To this day they do not speak to each other. If you think that’s bad, that’s nothing compared to the battle that can ensue between family members over ownership of a successful family business.
A struggle over a family business is not uncommon. In fact, in the nineteen years I have been a financial advisor, I’ve seen it ruin businesses. Whether the transfer of ownership or management is planned or unexpected, the task of passing the baton is unavoidable. What is avoidable, however, is the messy state of confusion that an unprepared family business can easily fall into.
As a small business owner, you basically have three options when it comes to succession planning. You can pass it on while you are still able and in good health. You can work until you have a health issue and are forced to sell, sometimes at a less than desirable price. Third, you can die and ignore the succession issue altogether, leaving the family and the business in chaos.
The first option of planning for the transition is the most desirable, but how can business owners achieve it? Succession planning is the answer. It provides family businesses with a vision and a mission: a vision of what their business, ownership, and management will look like in the future, and a mission for making that vision become a reality as smoothly as possible. Planning ahead brings clarity for the future of the business, and provides the family with guidance necessary to make the transition successful, and will also allow the family to avoid the potential for serious rifts.
Family businesses face unique challenges that set them apart from typical businesses. Foremost among these is finding a balance between business and family, that is, making decisions that honor the family’s values as well as benefit the business. An example of imbalance is when a father picks his oldest son to take over his business, simply because he is the first-born, when his youngest son is clearly the more competent candidate for the job.
Five Steps to Successful Business Succession Planning
1. Have a strategic plan: The first step to having a clear succession plan is to have a clear strategic plan. When it comes to a succession plan, simple is better. Every succession plan needs a simple layout that’s easy for everyone to understand. Think about where you want the business to be 5 or 10 years in the future. What will be the core businesses and customers and in what markets?
2. Keep it in the family. If your business is family-owned and you want to keep the peace, it’s important to make sure that your heirs apparent know exactly who is being slotted for what roles. Discussing the topic early, you’ll lay the foundation for a smoother transition. Take a look at the strengths of all the possible successors, as objectively as possible, and think about what would be best for the business.
3. Have an exit plan. Under what circumstances will the succession plan take effect? Would your departure be due to illness or retirement?Retirement? What financial situations will change? These questions help you determine what the succession plan should most detail. You should also consider the roles and responsibilities the successor will be expected to take. What control will the successor have over executive compensation? Over hiring and firing employees? What rights to the business will the successor gain? Can he or she sell the business?
4. Train your successor. If you decide to go outside the family, start devoting some serious thought to what you’re looking for in a successor. List the skills, interests, talents, and resources your successor must possess in order to capitalize upon the opportunity your business represents. Once you’ve decided on a successor, start working with them years in advance, if possible. Doing so will expose them to all the various aspects of the business — from the shipping docks, to balancing the books, to forming or solidifying important client relationships. Be the example they learn from at each step along the way.
5. Establish financial resources. Plan today for a better financial tomorrow. Reduce debt, set up a well-diversified portfolio, and look at investment opportunities that are independent of your primary business. There are a variety of tax advantaged retirement programs available that can help you maintain the same lifestyle in your retirement that you’re living now, provided you begin contributing to them well enough in advance.
Having a clear vision for your business is what gives it a future. Plan efficiently for that vision and prepare your business for the changes you can control. Successful succession planning gives you the opportunity to set yourself up for long-term success, so why not take it? If you would like to discuss your personal situation call me at (859) 225-2596, or write me at firstname.lastname@example.org.