small business

One of the most important factors of a successful family business transition is planning and executing the “hand-off” to the next generation. It is essential for the next generation to fully understand all aspects of the business, including day-to-day operations, company finances, long-term business cycles, how to hire and manage employees and how to negotiate relationships with partners and vendors just to name a few. At the same time, the successors also must learn to find innovative ways to maintain profitable growth in the face of competition and the ever-changing business environment. If you think about it, it’s a pretty tall order. This is why preparing your family members for a business transition and developing a solid succession plan is so important.

Often in a family business, especially one that is multigenerational, it is just assumed that the next generation will want to take over the business. This isn’t always the case and may cause trouble down the road. You should make sure that your successors want to take over the business and are able, in terms of knowledge and skills, to manage the business. If you plan to keep the business in the family, make sure that you spend time developing the business and leadership skills of your successor(s) well in advance and they actually want to take over the business.

While an internal transfer is typically less complicated from a business perspective, it may be quite complicated from a personal/relationship perspective. You should have a plan in place before approaching your children or family members.

Some of the most difficult challenges include:

  • Deciding who will succeed the current owner as President or CEO
  • Preserving and building the company’s value during a transition
  • Providing a smooth transition for owners, successors and key employees

While it may seem that splitting everything equally among your children is the fairest way to divide your business, it may not be if only some of your children work in the business. We have seen situations where this strategy resulted in the children choosing sides and destroying their relationships with one another. There are other ways to leave wealth to children who do not work in the business to keep everything equal and not cause a rift between members of the family.

It may also seem like gifting company shares to your family members is the right thing to do. However, having family members pay for shares in the company (which could be at a discounted rate) will help to ensure that they truly value them. There are also creative ways to minimize taxes and maximize wealth that should be considered before a gift or an internal sale is consummated.

Some of the most important keys to overcoming barriers during a family business transition include: ensuring complete transparency during the process, developing strong family governance, and a putting together a strategic written succession plan. Especially in small and family businesses, succession planning can involve a lot of emotional turmoil, and it is often helpful to turn to an outside, impartial group of advisors for help with navigating the process.

Statistically, the chance of a family business successfully transitioning from the first generation to the second is about 30% and the odds get worse as you move to third generation – less than 10%. Make sure that you give yourself and your successors enough time for the transition process, and that you’re informed about all of the choices available so that you can make the best decisions for you, your family, and your business.

Succession planning and choosing a successor for a family business can be fraught with challenges but in order to be successful, the emotional aspects need to be put aside in order to focus on the business. Having a sound succession plan in place can take the emption out of the planning and help ease the transition for both the business owner and his or her successors.

Photo Credit to fdasfdsa:Flickr