Originally published by Forbes, featuring Frank Williamson.
We’re grateful to Forbes for the opportunity to contribute to this important conversation. Read the full below.
Earlier this year, Gallup shared some thought-provoking statistics about older business owners’ long-term plans for their companies. Around a quarter intend to pass their business to a family member or someone else, and another quarter expect to sell. That leaves about half of all business owners who either plan to close their doors at retirement or, more concerning, have no plans at all.
Conversations about endings are rarely easy, so it’s natural to postpone big decisions and important planning. Succession can add further complexity involving delicate conversations and family dynamics. And yet, with over half of U.S. employer-run businesses owned by people 55 and older, the window for them to set a succession plan before retirement is narrowing.
Even business owners who recognize the need for a succession plan often don’t know where to start. Here is a high-level roadmap to help set the wheels in motion.
Exploring Family Succession
Many parents who own businesses hope or expect that once their children are grown, they’ll take over the family enterprise. But historically, only about 30% of businesses successfully make it through the second generation. While the exact reasons vary, a common theme is that parents’ ambitions frequently differ from those of their children.
Any business owner hoping a child or family member will take over after retirement should first confirm that it’s what everyone truly wants. The best way to find out for sure is to talk candidly with your family members about their aspirations and whether those line up with your vision. If they’d rather build a career elsewhere, you still have options, such as selling to employees or an outside buyer.
Navigating Conflict
Sometimes succession strains family ties not because no one is interested but because multiple relatives want to take over and their visions for the business don’t align. These differences shouldn’t be ignored. Over time, a family member who might have been passed over or has been relegated to a minor role might develop resentment that spills over into the workplace, and it can fracture family relations both on and off the job.
Family members sometimes address this issue at the outset by establishing ground rules for decorum and conflict resolution, referred to as a family pact. Although the agreement isn’t legally binding, its goal should be to consider the various personalities and perspectives and provide a blueprint for constructive communication and respectful disagreement. When adhered to, a family pact can be helpful for fostering a well-organized workplace and keeping family relationships strong.
Settling On Specifics
After exploring family succession, having necessary conversations and arriving at a decision, the next step is to decide the structure of the ownership transfer. There are a couple of options:
1. Selling The Business:
As much as many entrepreneurs would like to give their businesses to family, it’s often not financially possible because they need the money for retirement. Younger family members rarely have the funds or credit history to buy a business outright, so families usually arrange an installment plan that provides regular income to the seller while being manageable for the buyer.
2. Giving The Business:
When a business owner has the financial stability to give their business to family, they should explore how to do it as tax-efficiently as possible. It’s common for owners to establish a trust that retains ownership during their lifetime and passes the business down at death. This approach protects recipients from certain risks and offers tax benefits.
Any ownership transfer should be formalized with a business ownership agreement, which (among other things) sets a timeline for the shift of management responsibilities. This is important for both practical and emotional reasons. Your successors benefit from having increased independence to make business decisions. The transition plan benefits you as well by helping you start to mentally separate from the business you built.
Training Successors
If you’re like many business owner-operators, the hardest part of succession might be letting go. Leaving your business in capable hands requires training your successors thoroughly so they can take over with no decline in service quality.
Some personalities are better suited to certain roles, so it’s important to recognize those differences as you define your management structure. Once you do, identify the biggest knowledge gaps and begin working to close them.
As you promote your successors into management roles, gradually give them more opportunities to interact with and become trusted partners to your clients. Doing this over an extended period helps ensure that your retirement doesn’t prompt clients to switch to your competitors.
A Marathon, Not A Dash
Transferring a business to the next generation doesn’t happen overnight. It typically takes years, which is why succession planning should start long before you plan to exit. Given the many complexities of a business transfer, it’s often beneficial to involve an objective succession planning expert to ensure every vital detail, including legal requirements and paperwork, is handled properly.
While making these major decisions can be stressful, it’s far worse to wait too long. Start planning early to give your family the best chance of successfully continuing the business you built.