Unlike large corporations, family-owned businesses often fail because their founders or senior-level partners retire, become incapacitated, or die. Problems can also arise when the founder or one of the partners gets divorce or partners no longer get along and decide to part ways. Without thorough planning, any of these events can destroy an otherwise successful family-owned business.
So, every business has to change ownership at some point, and whether or not it survives such a change often depends on its succession planning. Business succession planning is the process of preparing for a transfer of the business to another person (often a younger family member) or a business entity. The main objective of the business succession planning is to transfer the business to a third party in a way that maintains or even increases the valuation of the business, minimizes tax liability, and minimizes the disruption of the business operations.
A business succession planning, however, is fraught with challenges and confusion. Contrary to a popular belief, this is not a process that happens naturally, quickly, or without thorough planning. The succession of a family business to an unrelated buyer or the next generation often requires significant financial and emotional commitment, can leave family members feeling uneasy, vulnerable, and prone to conflict.
Business Succession Planning
A typical succession planning involves three distinct areas: (i) a transfer of equity ownership and economic interest, (ii) a transfer of leadership and management, and (iii) financing. Each of these areas must be addressed in a solid business succession planning process.
Steps in Developing Succession Planning
There are many different strategies and options for succession planning. The following four general steps for developing a succession plan provide a good road map for the process:
Choose Your Business Successor – If you don’t have a family member who is able and willing to take the reins of your business. You may start by looking within the business organization, examining current senior management who may have the right leadership skills. In some circumstances, current employees of the business may be willing to buy-out the business from the owners. Privately-held family businesses will benefit from the engagement of the third-party consultants, who can provide guidance during such emotional period. This process should begin at least 5-10 years prior to a planned retirement.
Develop a Formal Management Training Program – First, you need to identify some of the most critical functions of the company and have your successor(s) work in each of these areas. It’s not enough for your successors to understand the executive responsibilities, they need to be able to step-in and lead the organization when the time comes.
Establish a Reasonable Timetable – Determine how and when control of the company will be shifted to your successor. It should be noted that the company’s ownership and management of the business may be transitioned to the successors at different times.
Execute the Succession Plan – If you have made the proper preparations, the execution of the business succession shall be relatively simply process. Businesses whose owners install their successors during their lifetime typically have a much smoother transition and the greater chances to preserve the success of the business for the future generations.
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