Succession is unarguably the most important issue affecting the longevity of a family business. If there is anything surer in the world of business, it is that one day, power would change hands because people would get old and retire, or die, or get too infirm to be able to continue heading a business.
However, a daunting statistics exist in the issue of succession as 80 percent of family businesses don’t transition to the second generation, and out of the 20 percent that do succeed, 80 percent of those don’t make it to the third generation.
Family business succession rates are so low because the family is an institution that rides more on emotion than reason as a lot of psychological issues come into play when it comes to handing over.
Again, owners of the business may find it difficult giving up control of the business they spent their entire lives creating and nurturing.
Also, the next generation may not like the way things are run in the business and may want to bring in their own ‘bright ideas’ into the business, and this most times does not go down well with the owners of the business.
But the fact remains that the younger generation must always succeed the older generation if a family business is to achieve continuity.
The best the owners of the business can do is to set up an effective plan on who should take over the reins of the business in the event of their retirement, and how it should be done.
How to Create an Effective Family Business Succession Plan That Would Outlive You
When creating a family business succession plan, a lot of things come into play and a lot of factors, both emotional and financial, have to be put into consideration. Let us consider some of them.
Most parents who own family businesses dream of the time their children, most especially the first son, would take over the business. They do not take into consideration the fact that the child or children in question may not be interested in the business.
This often happens when the founder shuts out the family from the day-to-day operations of the business or is so busy building the business and not spending time with their families that the kids begin to resent the business.
In order to create an effective succession plan, you need to consider if the successor you have in mind is even interested in taking over the business. If the person is not interested, or for one reason or the other is not available, then you need to start shopping for a replacement very early.
You can shift it to the next interested sibling or relation, but if no one in the family is interested, then you can bring in a manager from outside, or you decide to sell the business out rightly.
A lot of people are in the habit of putting off things till the last minute. This should be avoided when the issue of succession is in question. A lot is usually considered when preparing a business succession plan, so the family has to start well in advance.
The same is true for implementing a business succession plan. If possible, they should start planning the transition well in advance.
Train the successors
One business mistake entrepreneurs make is not getting their children adequately involved in the business while still wanting them to take over the business in the future. You need to work on building the skill set or engagement of the successive generation.
You need to hold regular family meetings and involve other family members in key conversations so they would understand the ins and outs of the business and are prepared to take it over when the time comes.
It may also be necessary to send the key successors for outside training so they can be proficient in the business. Training the successor would ensure that he or she is ready to fill the gap when the time comes, and not start off the business with trial and error.
If by dint of circumstance there is no time to train a successor, the owners can hire an outside CEO to run the business for a period of time so that they can step back and plan a transition in the future when everyone is ready.
They might also put a board of directors in place that includes non-family members to help guide the business and provide objective advice.
Settle entitlement issues
Granted, everyone would want to have a position in the company, but this idea would not be in the best interests of the business.
As a business owner, you have to device a way to make sure those who are worth it are given positions of trust, while at the same time not neglecting other people entirely.
If giving some people a larger share of the company would breed problems, you can decide to use voting and non-voting shares so that only some of the family shareholders can make decisions on company policy.
You can on the alternative decide to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children.
Seek the help of professionals
When creating a family business succession plan, it is advisable to get help from the outside as you may not be able to handle all the intricacies involved. A lot of professionals such as lawyers, accountants, financial advisers do help families make business transition.
There are even companies that specialize in family business succession planning, who will facilitate the process of working through both family and succession plan issues. The right professionals can make all the difference between peaceful and chaotic business succession.
Create a Transition Plan
A transition plan or timetable should be drawn up in advance to ensure continuity of management. This timetable should be re-evaluated periodically to determine if goals are being achieved.
Consider the options you have here. Would there be an outright purchase, gift/bequest, or a combination of these?
If the business is to be purchased, consider financing options including financing from an external party or self-financed from the retiring owners on a deferred payout basis.
To implement a sale to an outside third party, you will need to select a mergers and acquisitions firm that will market your company, identify a qualified purchaser(s), negotiate with them, and close the sale.
Put taxation into consideration
One issue new generations always face after succession is taxation. It should be noted that the transfer of a business can result in substantial tax consequences. You need to plan carefully to ensure that this impact is minimized.
Take care not to let tax planning determine any crucial decision to be made when drawing up your succession plan. You need to start early to devise ways you can negotiate a commercially optimal, tax-efficient solution to transfer the ownership of the business when the time is right.
You equally need to review owner estate planning to minimize taxes and avoid delays in transfer of stock to your successor.
Also endavour to create a buy/sell agreement that is fair, reflective of the value of the business, and minimizes taxes.
Decide to let go, and do so
A lot of business owners put clauses in their business/succession plans that would make it difficult for the next generation to operate the business freely. This is referred to as ruling from the grave, and it is one of the worst mistakes entrepreneurs can make when handing a business down to the next generation.
Trying to set up structures that will control what the next generation can do rather than allowing them to run the company the way they want, will only cause leadership ambiguity and create a stressful work environment for those family members who are left to run the company.
Founders of businesses especially family businesses should be emotionally and mentally prepared to walk away from the business completely when the time comes.
Taking all these tips into consideration would ensure that a business owner comes up with an effective succession plan that would outlive him or her. It should be noted that much of the success of transferring a business to family members is rooted in communication.
The ability of the family to discuss difficult and complex issues openly and deal with conflict is vital in the transfer process. Open communication can minimize the possibility of playing out ancient feuds, sibling rivalries and parental conflict.
If a family is having issues with proper communication, they are free to include a third party when drawing up a succession plan to ensure that every one gets to agree on modalities.
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