While the idea of a family business being passed down from generation to generation may seem antiquated, it has begun surging in our economy once again. Currently, 50% of American GDP is created by family businesses. They’re responsible for 60% of jobs in the United States and 80% of new job creation.
However, only one-third of family businesses successfully make the transition to the second generation. Whether this is due to poor planning or lack of interest, this trend may negatively affect families and our economy as a whole. While most parents think highly of their children, only 52% of current owners feel the second generation can actually take care of the business.
The hesitancy on the part of some parents is understandable. Their business is something they created themselves and has absorbed much of their life. It is their legacy. Also, some of these parents are going to be retiring soon and would like to collect their retirement from the business. With one-third of small business owners being 55 and older, the concerns over family businesses remaining profitable after the original owner’s retirement are becoming more prominent around the country.
Planning, Planning, Planning
As with much of life, plans are often disrupted by life. As a family business owner, you may think you’ll live forever and then a heart attack happens. You may think your son or daughter is an incredible person; however, later you find he or she lacks necessary skills to run the business. You may believe that your business is recession-proof, but many people in recent years have lost businesses who never thought they would. Even though plans may be disrupted, explicit planning is actually one of the major keys in family business succession.
Five Planning Steps
Of course, there’s a right way and a wrong way to plan; there are certain planning steps and checkpoints that must be met. While these can’t guarantee success against all obstacles, they can make for a smoother transition to the next generation.
One: Establish Goals and Objectives
First, review your current succession plan and rationality of achieving your desired goals. If you don’t have a succession plan, start thinking about one. It’s unreasonable to think you can hand over the family business on your deathbed without any previous training.
This is also the time to start developing a vision and objectives for your business. Sit down with your potential successor, and build a vision together for the business. You may find you and your successor have very different ideas on the function of the business. If you can come to an agreement on what the business’ vision and goals should be, both parties claim a stake in and ownership of the business’ success.
Determine the importance of continued family members’ involvement in the business; however, consider the option to bring in professional management. Families in previous generations stayed close together and land was passed down, but today’s world is globalized. With the advent of international transportation and the internet, families are spread across the world. While you may want your business to stay in the family, your children may not be interested. You may have to bring in professional management to continue on your business through retirement.
Establish your personal retirement goals, and assess your cash flow needs. Whether you have faith in your child’s ability or not, the business could simply fail. Indeed, having a good financial plan for yourself is wise.
Two: Establish a Decision Making Process
While all families have their quarrels, there’s not much room for that in business. You need to identify and establish how family members will play roles in decision-making. Also, establish a method for dispute resolution if needed. Having these ground rules set up before you decide to step back allows the child to take leadership and handle disputes. There’s no need to come back to you if everyone already agreed to these rules.
Three: Establish the Succession Plan
The succession plan you write down will be one of the most important documents you ever make. Here you’ll define your successors – both management and non-management. It’s wise to include roles for all family members. Some may be part of the daily business operations, while others may just help during special events. Identify additional support your successor will need from family members.
Document succession plans in writing. This is absolutely essential to a seamless transition. If you rely solely on a verbal conversation with someone as evidence of a succession plan, it can quickly become a “he said/she said” debacle. Especially if you were to pass away, documenting your wishes is the best way to prevent a legal fiasco between family members.
Once documented, the succession plan must be communicated to your family members and/or stakeholders. It’s not enough to write it down and seal it up. Family members may need to prepare before they’re equipped to take the reins. Your possible successor may have no idea about your industry or how to take care of your clients, for example. Frequent and thorough communication is therefore a must.
Four: Create a Transition Plan
Once all these major details have been worked out among your family, having an actual transition plan is a must. There are specific financial details, such as tax implications and estate planning. This is also a fantastic time to review your estate plan to minimize your taxes and avoid delays in the transfer of stock remaining to owner(s) or a spouse.
Consider your transition options. Do you want the transfer of your business to be considered a gift or a buyout? If you want a buyout, consider your financing options, such as self-financing or external financing options. Finally, you want to establish the timeline for your succession plan and retirement.
Five: Consult an Advisor
There are many plans that need to be made when you prepare to hand down your legacy to the next generation. While you may be able to anticipate some things on your own, an external advisor may show you what you’ve missed. At Retire On Purpose, we’re the independent, objective party that can help you plan a seamless transition.