If you’re running a family business, you likely hope to pass it on to your children one day. After all, you’ve invested significant time building it so that you can provide for your family, give your kids a solid start in life, and pass on your legacy. Unfortunately, a majority of business owners don’t have a concrete plan in place for succession, and many end up delaying retirement because issues arise during the transition that they were not prepared for.
Though you may not be expecting to retire for decades, it’s important to start thinking about your family business’ transition today. Your children will need time and support to develop the skills required to take over your business. If you don’t have a solid plan in place, the transition can be hampered by or disputed by other family members. Most importantly, it takes time to get everyone on board with your vision for the future of the business.
What is family business succession planning?
You can think of family business succession planning as a will for your business. It’s a written plan that outlines who is going to take over from you once you leave the business and how the transfer will happen.
- You can specify the person you want to manage the day-to-day running of the business or assign several people to leadership roles.
- You can also decide who will inherit ownership of the business. For example, you may choose to divide it among your children or assign one family member a controlling share.
- The succession plan will also usually specify how the transfer of ownership will happen.
Family business succession planning ensures your wishes are carried out if you die, if you can’t work anymore due to illness or injury, or if you simply retire.
Why do family businesses need a succession plan?
In large corporations, transferring ownership or management is clinical and heavily scrutinized. If the CEO steps down, there is a process in place to interview and hire a new CEO. The new CEO’s role and responsibilities are clearly defined, so they know exactly what is expected of them. Transfers of ownership are also relatively simple, with people buying and selling shares of the business on the stock exchange.
When it comes to family businesses, however, things are a lot more flexible. They often include multiple family members pitching in with a variety of skill sets, and their roles are usually loosely defined. For example, you may manage your staff and act as the business’s accountant. However, your children may be great with numbers but not so good with people or vice versa. It’s important to clearly identify who will do what once you retire.
You may also find that each member of the family has a different view on how the business should be run and what direction it should take in the future. If you want to make sure your wishes are carried out, family business succession planning ensures that the person in charge understands your vision and goals for the business.
How do you write a family business succession plan?
Family business succession planning can be quite complex, but there are a few basic things that all plans should include. We discuss these below to help you get started.
Decide on a business structure
If you have a small family business, chances are you’re operating as a sole proprietor or perhaps in a partnership. This means you’re subject to laws and tax codes that wouldn’t apply to a large corporation, including inheritance taxes. You could convert your business to a corporation, but keep in mind that there are advantages and disadvantages to each type of business structure, so it’s a good idea to speak to your accountant about which one is best for you.
Determine your mission and vision
Family-owned businesses have attributes that set them apart from their large corporate competitors and which give them an edge. For example, they may offer innovative products, custom designs, or just personal customer service. It’s important to clarify what the key values and mission of your business are so that you can communicate them to others and make sure the legacy continues after you’re gone.
Name your successor
Inheritance is an emotional topic, and choosing a successor can involve navigating complex family dynamics. But it’s also important to consider what’s best for the business. Consider the skillsets each candidate brings and get feedback on their performance from a wide range of sources, including financial advisors, life insurance brokers, accountants, staff, and key vendors. This will help you get a better idea of their strengths and weaknesses, so you can decide who the right person for the job is, where they may need to develop skills, and how you may need to structure your business, keeping their limitations in mind.
Involve your successor in planning the succession
It’s also a good idea to talk to your successor and include them in the planning process. It’s a good way for you and them to honestly reflect on the weaknesses and strengths they have to offer. Ask questions about their qualifications, motivations, and emotional state. Discuss ways you can help them grow into the role.
Ask your employees for their insights
Your employees probably see a side of your successor that you don’t. They can offer invaluable insights and are more likely to be engaged and enthusiastic about changes if they have some input. Your successor will need their support and acceptance, so it’s best to start setting the foundations for that now.
How can I ensure my family business succession planning is successful?
Industry experts suggest a few techniques to ensure your business succession plan works, which we discuss here. The common thread in all of these is collaboration. The aim is to create a plan that everyone can get on board with, which evolves over time.
Discuss family dynamics openly and regularly
As individuals, we are constantly growing and evolving, so it’s no surprise that our family dynamics keep shifting too. As children mature into adults, their relationships with their parents evolve. Siblings may grow closer together or further apart in their thinking. Adding a family member through marriage may significantly change the way the family interacts with one another. And, of course, there are always intergenerational disagreements to resolve.
The bigger your family gets, the more skills, experience and talent the business has to draw from. But it’s also critical to manage the diverse opinions and expectations that each family member brings so that they don’t negatively affect the business. The best thing you can do is talk about these differences and changes in a constructive manner. Ask questions, be curious, and discuss how you can build a strong future for the family business together.
Seek advice from people outside the business and outside the family
As instinctive as it may be to “keep it all in the family,” it can be very helpful to seek other opinions as well. Accountants and lawyers are often involved in the transition process. They can help you prepare and foresee obstacles you may not even have considered. Other business owners are also a great resource. Though they may not be in the same industry as you, you can gain a lot of insight by learning how they managed their transition, the pitfalls they encountered and the decisions they made.
Keep an open mind
Family businesses can sometimes get bogged down with tradition. Rather than doing things the way they’ve always been done, be explicit about what has worked in the past and what needs to be changed. Intergenerational values can be a source of conflict, or they can help generate new and fresh ideas. The world is changing quickly, and your business needs to adapt or become obsolete, so encourage innovation from everyone involved.
Be flexible in your planning
As things change and the family evolves, you may find your succession plan needs to be adjusted. Rather than choosing your successor and setting it in stone, reassess your plan periodically. Ask yourself if you have the right people in the right jobs that will allow the business to flourish.
Discuss the future with your family
Looking back at what worked and what didn’t can be very helpful, but just as important is dreaming of a brighter future. During the succession planning process, talk to your children about your aspirations, both personal and for the business. Ask them what their aspirations are. Remember that you’re building this future together, so everyone should be involved in the planning process.
Who can help me create a successful family business succession plan?
There is a range of people who can advise you during the family business succession planning process. Getting multiple perspectives will help you make informed and balanced decisions.
Family business owners
Mixing business and family offers a unique set of challenges that only another family business owner can understand. Networking is a great way to remind yourself that you are not alone and to get advice from people who have been in your situation. What did they do, what can you learn from their experiences, and how can you avoid their mistakes? Can they refer you to a great accountant or lawyer who specializes in family business succession planning?
An independent board of experienced directors can give you a fresh perspective on business investment and growth decisions. This is only usually an option for larger family businesses. Smaller businesses are more likely to consult individual advisors.
Lawyers, accountants, and other professional advisors can be very useful. It’s critical that you find people who have experience working with family businesses and who understand what you are trying to achieve.
Engage your employees by asking for their opinions. They can offer a completely different perspective to the one you see as the owner and can be a great source of innovation and new ideas. They are also more likely to be on board with the transition if they feel they were consulted during the process.
Since your family will be affected by the succession, it’s important to get their input when you’re planning it. If everyone is on board, the transition is more likely to be a success.
When does family business succession planning fail?
There are a few things that can hamper the transition of your business, creating chaos for the company and conflict amongst your family. We discuss the main pitfalls below so that you can plan for them in advance and avoid them altogether.
The business doesn’t have a clear structure
Family businesses often lack formal governance structures, blurring the lines between business and family. In the long run, this can also affect inheritance plans and create friction between family members. A good family business succession plan sets out a clear governance structure, and the steps to implement it, preferably before the transition occurs.
There is a lack of knowledge around succession planning
Many business owners don’t have a succession plan in place or even know how they work. This not only risks the business, but also the family’s inheritance and income, not to mention the emotional strain it can cause. As we mentioned earlier, there are a variety of people who can give you advice and help you get started with the planning process.
The business isn’t liquid enough
When a family member leaves the business, they usually need to be bought out. For a small business, finding cash quickly can be very difficult. It’s important to have a plan in place to manage this sort of large cash flow.
The owner relies on estate planning instead of succession planning
Estate planning and management succession are completely different things. Many families assume that the transfer of the business will be taken care of in their will. Unfortunately, your will won’t include a plan for retirement or permanent illness. Nor does it specify how the business will be managed after you step down.
What happens when you inherit a family business?
Ideally, your family will have a plan in place for the succession of the business. If you are going to inherit, hopefully, you have already discussed the transition with your family so that everyone understands how the process will work and what your role will be. Sometimes, however, there is no plan, the inheritance can come as a surprise, or just earlier than you expected.
No matter what the case, there are three main courses of action open to you.
Take over the business
This is when family business succession planning is really helpful. The succession plan will tell you the business’s strengths and challenges as well as its financial goals and other information you’ll need to manage it effectively.
Work with a partner
Taking on a business is a huge responsibility and can also be financially risky, particularly if you don’t have much knowledge of the business. Working with an experienced partner can reduce the financial burden and stress and help you get on top of things.
Most people pick their sibling or cousin to be their partner, but it’s important to remember that this isn’t just a personal choice but also a business decision. Think carefully about what experience your partner will bring and whether their strengths will complement your weaknesses.
Sell the business
You may inherit a business that simply isn’t the right fit for you. You may already have a successful career in another field, or perhaps it’s just not the right time for you to take on a new venture. Whatever the case, you always have the option of selling the business. If there are other partners or shareholders involved, they may be able to buy out your share. Or, if you are selling to an unknown third party, a broker can help you find the right buyer and get a fair price.
Family Business Succession Planning Checklist
- Even if you have an estate plan, you should also have a family business succession plan
- Articulate a clear mission and vision for the business’s future
- Differentiate between ownership and management
- Define the business structure and everyone’s roles
- Choose a successor
- Balance family dynamics and business considerations
- Mix traditions with innovation
- Involve your family in the planning process
- Get feedback and ideas from employees
- Consult external sources like accountants and lawyers
- Get everyone on board with the plan
- Be flexible and regularly update the plan
Though it can seem a daunting task, family business succession planning is essential for the financial wellbeing of your family and the success of your business. Keep in mind that the process is fluid and that the plan can be adjusted as your family and business evolve. There are plenty of resources available and people who can help you develop a plan, but the important thing is that you get started straight away.