Many business owners are keen planners, able to consider both the short- and long-term needs of the company. For many of those thinking of that long-term plan, the dream is to eventually pass their hard work to the next generation, ensuring the company continues to support the family into the future.
While this situation might seem ideal, the reality is, few businesses are actually prepared to execute this handoff.
Formal succession plans
A smooth transition does not just happen. It requires meticulous long-term planning, with an owner taking all possible factors into account. Yet most family businesses appear to be taking a more casual approach to the transition.
According to one industry survey, 58% of family businesses say they have a succession plan in place. Most of those are informal, however. In total, just 18% of family businesses have a formal succession plan. Despite this, nearly 4 in every 10 family business leaders say they plan to pass the baton within the next five years.
With statistics like this, it is no wonder only about one-third of family businesses last through the first generational transition.
How to properly prepare
Succession plans are inherently complicated. You’ve been an integral factor in every major decision at the business – removing yourself requires every piece around you to shift and adapt. There are steps you can take to ease the transition, however. These include:
- Prepping future leaders
- Planning a succession to occur during a period of relative financial calm
- Establishing expectations and new roles among employees, other leaders in the company, and family members
- Laying out a clear, fair process for the transition
- Communicating constantly
Formalize the plan
Maybe the best way to ensure succession is as smooth as possible is to document every aspect of the plan as part of a formalized agreement. This should include a clear timeline for the transition, your role during each step, the responsibilities of the new leader or leaders taking over, and the role of other partners or key business leaders around them.
There are also financial considerations. You might need to negotiate structured buyouts, establish family limited partnerships and take all possible tax obligations into account. Spelling out these needs as part of a documented plan – something an experienced business law firm can help accomplish – minimizes the potential for conflict and disputes related to the change.
Succession plans are difficult enough. By being proactive, you can avoid further headaches down the line.