There are more than 15 million family-owned businesses in the United States, ranging in size from one-man businesses and mom & pop shops to multi-million dollar corporations like Mars and Walmart. In spite of the large number of family-owned companies, only one-third will make it to a second generation. One reason for this is because companies sometimes fail to plan for their eventual exit, also known as succession planning.
What is succession planning? It is a strategic planning process where the owners of a business decide how the business will continue after they’ve left the company – through an internal or external sale, an illness, injury or death, retirement, or simply wanting to move onto another opportunity.
For those who wish to see their businesses continue after they’ve left the company, it is important to plot out the continuation of the company. Here are the basic steps involved.
1. Plan early for a smooth transition from one owner or group of owners to the next. You might think you have years to plan – and maybe you do – but sometimes life doesn’t go as we expect, so preparing for contingencies is critical.
2. Bring in outside experts. Hiring a team of professionals, including attorneys, accountants, financial advisers and other key consultants, is important to ensure that every detail has been considered. They will employ their expertise to advise you, so that you can focus on the decisions that need to be made.
3. Involve family members in the planning process. As you develop your succession plan, involve key family members to explain your plan and ask for their input where appropriate. Doing so will help you create goodwill and perhaps gain their support.
4. Train your successors. Once you’ve selected your successors, take the time to work with them so they are prepared to take over when the time is right. Your successors will need your input to look at the big picture of running the complete operation, rather than the duties that they are currently responsible for.
5. Consider all options. There are three critical financial areas where business owners should focus – management, ownership and taxes. As you prepare your succession plan, understand that ownership and management may not involve the same people. One person, for example, might become the company’s leader, but ownership might be spread among several people. How will this impact your tax liability? How will it impact theirs?
6. Review the financial impact of your succession plan. The transfer of a company with a lot of assets will have financial impacts on successors and heirs. Talk with your attorney and accountant to identify the potential impacts and develop strategies for minimizing any negative effects.
7. Be realistic. You may have always dreamed that your son would take over the business, following in dad’s footsteps, but what if your son doesn’t share your dream? Is it realistic to ask him to take over the company when you’re gone? Is there someone else in the company better suited for the job? Perhaps your daughter, who works as CFO, is a better fit, or maybe an outside sale is the best option.
There are many factors to consider and multiple decisions to be made. Gather your team of professional advisors together, along with family members who may be impacted, and start the process now. By planning early and effectively, you can ensure your firm’s continuation after you’ve moved on.