Family-owned businesses make the world go round. In fact, there are more than 5.5 million family businesses in the United States alone.
Unfortunately, only 30% of family businesses make it to a second generation. That number drops even further beyond that. Only 13% survive to see a third-generation takeover.
That’s a scary thought if you’re a business owner hoping to pass the company on to your children. It’s your legacy, after all, and you’ve put in years of hard work, time, and ingenuity to build your family brand.
It’s never too early to begin planning your family business succession if you want your business to find success with future generations. This lack of succession planning is often the leading cause of these businesses dying off.
Here are five critical steps to take for successful succession planning. If you want to keep your business in the family, you’ll keep these important factors in mind while plotting a future for your company.
1. Talk to Your Family
If you’ve been hoping that your children might one day take over the business you’re building, it’s understandable that you might be disappointed if they have other plans. Still, when you begin discussions about the future of your company, it’s best to present their taking it over as an option for them rather than an obligation.
Maybe your kids grew up watching you run the business. Depending on the field, they might have even helped you out in their free time. Either way, they probably got a close enough look at the business to tell if it’s something they feel passion for or not as they become adults and plan their lives.
It might be a difficult conversation to have, but you can’t make any assumptions. It’s possible that interests simply lie elsewhere, and they have their own personal and career goals. In this case, don’t be offended. Everyone has their own dreams.
But it is important to know if they intend to join the family business sooner than later. As you near retirement age, you’ll need to make appropriate plans for your company, which could mean selling it if your children aren’t interested in running it. Or you might have the opposite problem and have more than one child that wants to join the business. In this case, you’ll need to come up with roles for each child, so you keep everyone happy.
And remember, if your own offspring don’t show interest in the business, but you want to keep it in the family, branch out a bit. There might be a grandchild, cousin, niece, or nephew who would love to carry on the family legacy.
2. Groom Your Next Generation for the Job
Once you know if your child or another family member plans to join the family company as an adult, start preparing them for the job as early as you can. Even if they’re a pre-teen or teen, you can find age-appropriate tasks to assign them, so they get used to working in your field.
For instance, if you own a restaurant, you can let them work as a server in their teens. Or if you own and operate a small medical office, you can train them to help you with administrative tasks as early as high school.
As they get older, you can guide them through college and let them know which field of study would be best applied to your field or business. You might even want to encourage them to spend some time working for someone else before joining your company. This will broaden their experiences in your industry.
Then, they should join your company in advance of your retirement. This will give them plenty of time to grow into the role of CEO or owner. You might want to consider starting them out at a lower position so they can get a feel for every facet of the business. If you have several employees, this prevents resentment from building if they see your child putting in the work.
3. Develop a Plan for Succession
It’s important to start planning your business succession in the wake of your retirement or death early. Once you identify the family member who will take over, you’ll work with that individual as well as any other key decision-makers for your company – managers, board members, co-owners – to create a strong succession plan.
Once you identify your successor, next you should obtain a valuation of your business. Of course, the value of your company might change over time, so it’s important to have this done every few years to keep your accounting and paperwork up to date.
Then, begin planning what your succession will look like. There are a lot of questions to ask yourself. Will you have several family members taking over different roles or just one individual coming on board? How will you train them? And how will this affect day-to-day operations? Do you have a timeline for when you plan to hand the company over completely? There are also legal and financial matters to consider. Does the change in ownership affect any legal requirements of your business?
4. Consider the Finances
It’s not always fun to talk about money with loved ones, but it’s important to discuss the finances when it comes to family business succession planning early. It’s important to be clear and concise when talking about money. You don’t want any party involved making assumptions about the deal.
First, ask yourself if you’re planning to gift the business to them or if you’re selling it. Your answer will change the steps you take.
If you choose to gift it to your family member, is this something you want to do immediately, or do you plan on leaving it to them as part of their inheritance? And remember, there might be tax implications if you just give it away.
If you’re selling it to them, then you need to create a buyout agreement that satisfies everyone involved. Having everything in writing will make the transition easier and make it less likely for family disputes to arise. This agreement can also be used to help ensure your company is kept in the family.
5. Know When to Step Back
After building your own business from the ground up, it’s natural to feel attached to the company and how you’ve done things over the years. But as you prepare your business for the future, it’s important to let your next generation of owners take the lead and try new things.
If they’re coming in with fresh eyes and energy, they might have some interesting ideas to grow revenue, attract new customers, and operate more efficiently. Be open about your opinions and be ready to serve as a mentor, but don’t stymie their passion and interest in leaving their own mark on the business.
Ready to Start Planning Your Family Business Succession?
Don’t allow your years of hard work to go to waste. Let us help you guide your company into the future with a strong family business succession plan.
Contact our team of professionals to schedule an appointment so we can get your next generation ready for running the family business.