In the majority of family owned businesses, there is usually a strong desire to keep that business ownership within the family and to maintain that legacy, even when the founding generation prepares to retire and move on.
This is why a succession plan is vital. While many think of succession planning in terms of a much larger corporate structure, it is equally important at the smaller, family owned level. And the best step any such business can take to ensure future success is to start planning early.
We see this with family owned business clients of ours again and again. A founding member, a family patriarch or matriarch, is preparing to transition out of the business. That person wishes to have a family member take over. What needs to be done? What type of training is needed to bring continued success? How can the family members taking over afford the business and keep it profitable? And how can the retiring members achieve their financial needs before exiting?
These are the right questions to ask, and provide the foundation for a succession plan that can keep such businesses viable for years to come.
When putting a succession plan in place for a family run business, there are a number of key elements to consider. First and foremost is timing. Such transfers, even to family members, takes time – typically we advise our clients that three to eight years is the amount of time needed to properly map out a successful transition.
The next element involves owner objectives. Will the next generation have the same objectives as the previous one? Even in a family owned business, the goals could alter slightly, as succeeding family members may possess different skillsets and vision than the exiting ones. What is usually of great value, however, is keeping that family culture intact, and in a well-designed transfer plan, these objectives are addressed and outlined long before the transfer ever takes place.
Certainly there are financial elements to consider, such as growth in business value, cash flow and minimized tax implications. Even as an owner or principal prepares to retire and divest from the business, when it is family owned there is still a strong desire to see the successful legacy continue, so all of these financial questions must be addressed at the outset.
Another critical element is having the right management structure in place to take over the day-to-day business operations. In short, the exiting owners want the company to be in the right hands. As we have seen on many occasions, often in family businesses younger up-and-comers are encouraged to work outside of the family structure before coming into the business. This can prove very valuable and can not only enhance their personal skills, but also allow them to bring other valuable acquired talents to the table.
As the transition takes place, there should be specifically defined steps, in writing, that lay out an incremental transfer of power. This allows the exiting owner to remain in the driver’s seat even as new principals slowly assume controls, and can also safeguard against people backing out (even in a family structure we have seen this happen) or changing their minds on how the new leadership will be structured. This is particularly imperative when more than one person is entering into management after the transition. Complete control does not have to be transferred right away, and a gradual transition works best.
Planning in advance and putting everything in writing also helps to mitigate against unforeseen problems, such as illness or some form of disaster. These are the issues that people never see coming – such as an exiting partner becoming ill or even dying before the succession has happened, or the business being damaged by a fire – but procedures and protocols can still be put in place that will allow the family to ease through such a difficult time in a more controlled manner.
Finally, the succession plan for a family business should have clear deadlines and goals, a “road map” to bring the business step by step to its desired transfer of power. Any plan should include a timeline and provide accountability – who will do what, and when – for all family members involved. Having goals to meet along the way gives a company a much better chance for success at the end.
Again, the most important part of a successful transfer of power in a family owned business is preparation. These plans simply cannot be put in place overnight. This is why starting early to plan for that transition is the best path to success for everyone involved, and can instill both present and future business owners with the peace of mind of knowing the family business culture will remain in good hands.