Family Business Succession Planning: 5 Tips to Transition a Family Business
Updated: Oct 27, 2020
If you've watched the TV series, "Succession" you know what NOT to do when deciding who will be the next owner of your family business and how you structure your succession plan. Here are 5 Tips to help you transition your family business from one generation to the next.
Family Business Transition Planning
Tip 1 - Is Anyone Interested?
You need to determine if anyone is interested in taking over and buying the family business. Every so often I come across a case where no one in the family has interest in the family business. Often mom and dad assume that one of the kids will want the business or the farm, but sometime, this isn't the case. So before you make a bunch of plans to pass your business on to someone in your family, take the time to ask them if they are even interested in ownership. And for someone to answer this important question, they will need to understand both the benefits and the challenges of ownership. So you will need to be prepared to share financials, business challenges and a host of other things so that the potential incoming owner can make a decision based on facts and not on emotion, obligation or misinformation.
Tip 2 - Get the New Owner Prepared
Most family business owners make the mistake of preparing for their retirement and the financial transition of the business from one owner to the next, but neglect to prepare the next owner to be the next 'leader' of the business. This means taking a year or two to train and mentor the future owner in all aspects of the business. Likely, you need the business to be successful financially to help fund your retirement. To accomplish that, the new owner has to be successful at being an owner, leader and manager of the business will not be as successful as it could. As the outgoing owner, you have both the responsibility and obligation for the mutual benefit of all parties to do your part to ensure that the incoming owner is adequately trained and mentored.
Tip 3 - Time Your Exit
One of the most important, yet most often mishandled aspects of family business succession planning is determining the proper time to exit your business. Exit too late, and the future owners may become resentful, impatient or complacent. Enter too soon, and you may not have allowed for enough time to prepare the incoming owners, the employees or the business causing unnecessary harm to everyone. The best plan is to create a schedule for your exit. How long will you active in the day to day operations? How long will you act as a mentor or advisor to the new owner? At what point can you afford to step away? Answer key questions like these, then create a timeline with benchmarks and stick to it.
Tip 4 - Set a Structure
This applies mostly to when numerous family members will be taking over ownership. Let's say it's your son and your daughter. You need to create a structure for them. What are their job titles? Who is responsible to do what? Who has authority? This detail is often intentionally ignored by mom and dad because answering questions like these can be difficult. It may seem like you are putting your one of your children ahead of the other, or not treating them 'equally.' The problem with not addressing these important questions, and setting a workable structure before you retire is that at some point, and likely sooner than later, your kids will have to answer these questions on their own which can lead to a host of other and bigger problems. So be determined that you will work through the tough stuff before you ride off into the sunset.
Tip 5 - Get Help
You know the statistics. About 70% of family owned businesses fail to transfer ownership from the founding generation to the second or sibling generation. And the statistics are even worse if you are a second generation business and looking to transfer ownership to the third generation. When you think of your family business as likely the most financially valuable asset that you have and your family being the most valuable personal asset that you have, one simply cannot afford to take any risk. It is in your best interest, your families best interest and the best interest of the business to get the professional support to help you transition your business as effectively as possible.
About the Author
Chris Hall is a Senior Business Management Consultant and Family Business Advisor that has spent more than 10 years helping business families manager more profitable businesses that can be successfully transferred from one generation to the next.