Every owner of a closely-held family business wants to know the business will continue—even thrive—once they’re gone. A well run, well managed family business can provide for you and your loved ones long after you’ve stepped down from its operation. It can even support your family after you’re gone. Most owners I talk to expect that their business will continue long into the future.
The reality, though, is less encouraging. According to the Family Business Institute, only 30% of family businesses survive into the second generation—most often due to a failure in the succession planning process on the part of the business owner.
In many ways, your succession plan is like a will for your business. No one wants to dwell on thoughts of when they’re gone, but doing so is necessary to care for the ones we love—including the business you’ve poured your energy into.
In the worst cases, I’ve seen ineffective and unrealistic succession plans result in infighting amongst families, and even the liquidation or collapse of businesses.
In the best cases, I’ve seen families spring into action, with each person knowing their new role, and the business running as strong as ever. (…And the IRS failing to take more than is owed by law.)
Why succession plans fail (and cause businesses to fail)
There are a few problems I see small business owners run into time and again.
One of the biggest is objectivity. I talk with owners all the time who “know” that their son (who has only briefly worked as a manager) has what it takes to guide the company in the future, or they “know” that their daughter will take over their leadership role.
“Have you asked your daughter if she wants to take over for you?” I ask.
“Well, I don’t have to!” my client says.
That’s the start of a difficult conversation, to say the least.
Preparing your child (or sibling, or partner) for a role they don’t want is a recipe for disaster. They conversations may be tough—acknowledging that someone isn’t, in fact, fit for a leadership role can be heartbreakingly painful—but in the end, no one is served by an unrealistic plan.
Strong communication can soften these blows. Make sure you know all the stakeholders in these decisions. While you might have the last word, your choices will affect your loved ones for many years to come, from your spouse to your children to your employees.
The last thing you want is for your loved ones to be surprised at your decisions—especially once you’re gone. By sharing your thought processes, and seeking open feedback from your family, you can make sure that you don’t blindside someone with a role they don’t want or aren’t ready for… and ensure you aren’t blindsided either.
Keys to an effective succession plan
With that in mind, there are a few aspects that great succession plans have in common.
Plan early
The first is an early start—in fact, the sooner you begin this process, the better.
By planning for your succession long before you may need to, you’ll have much greater flexibility. Depending on your situation, you may be able to transfer ownership of the business to your children and thereby avoid an unnecessary estate tax, or you may decide to slowly transition new leaders, managers, or employees in to the business.
Train your key players
Planning far in advance allows you to ensure that your plan is much more than just a list of names and roles. For that reason, I’ve heard it called succession development rather than planning—the idea being that you want to make sure key people can grow into their upcoming roles, rather than being thrust into them.
Think of it like a football game—you don’t wait until your starting quarterback is injured to have your backup go suit up. No, you want his replacement not just dressed out and sitting on the bench, you want him to be well-trained, warmed up, and excited to get in the game.
Focus on 3 roles
As you think about the business after you’ve stepped down, there are 3 roles that will need to be addressed in every business—ownership, leadership, and management.
For closely-held, family businesses, ownership almost always transfers to one’s children (often split between many children).
Leadership, on the other hand, may go to a partner or trusted employee, depending on the capabilities and wishes of one’s family. (Remember how important it is to be honest, and to solicit honest feedback?)
Management often must change with the leadership, as the most experienced managers are promoted. Who will replace the new leadership in their previous roles? Often your current managers can identify their best replacements from within.
Involve your accountant & attorney
While much of your succession plan has to come from you—your decisions and your wishes about the future of the company—there are a lot of aspects that require outside help.
When it comes to transfer of ownership, tax planning, and legal issues that might arise, listen to the advice of a trusted accountant and attorney. More often than not, they’ll save you much, much more than they cost you.
Case in point: the 35% estate tax. If your personal assets (including life insurance benefits paid on death) and business valuation together exceed about $5.1 million, your family will be responsible for at least $1,780,000 in taxes. If they don’t have that kind of cash on hand, they may need to liquidate your company just to pay the taxes on it!
With smart planning, though, these kinds of problems can be headed off long in advance.
Don’t put it off
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