Who Will Follow You?
What will happen to your funeral home or cemetery after you retire?
Are you training someone you trust to succeed you?
The future of your company—your legacy—can hinge on a good succession plan.
For many Americans, owning and operating their own business is a dream come true. Being your own boss and making or breaking it on your own terms has a certain allure that inspires many entrepreneurs. But once a business is established, there's more to think about than where the next contract will come from. You need to make plans for how the company will evolve in the years ahead and after you stop working.
While people often assume the family business will just pass from one generation to the next, statistics suggest otherwise. According to the U.S. Small Business Administration, only 30 percent of all family businesses succeed to the second generation, and of these, only 15 percent survive into the third generation.
If yours is a family business and more than one of your children has joined, you face some especially delicate issues. They include determining what roles your children will play now and what management responsibilities they will take on later. Very fortunate families transition
smoothly, but that may be less because of luck than because of good planning. So smart business owners develop a plan with contingencies.
How to Prepare
Whether you intend to transition to relatives or to close members of your company's "family," or you plan to hire your replacement or even sell the company outright, a good business succession plan helps the process. To prepare for the transition, ask yourself some important questions:
• Have you discussed your vision for the company in a way that is clear to all involved?
• Is it more important to you that your successor be the person best able to run the business or best able to keep peace in the "family"? (If you're lucky, that will be the same person.)
• Do those not selected to lead have a clear picture of what their role is to be, and have you prepared them well to take on that role?
• Do you have a backup plan if any of your designees decline the responsibility you have in mind for them?
• Is a buyout part of the transition, even if it's to family members or longtime employees?
• Will you stay on as a consultant, or turn over the reins all at once?
These questions are important whether you are passing the company to family members or unrelated employees.
If you have always been a sole proprietor, you'll need to adjust to sharing responsibility during the transition. If you're sharing it with an adult child, that will likely require an even greater sensitivity.
To some people, leadership comes naturally; others make great team members but are less inclined to take the risks associated with leadership. Be aware of these kinds of issues and mentor your replacement. Keep in mind that a mentorship is not a dictatorship. Learn to step back and let your replacement assert his or her authority. Sooner or later, that person will be in charge and needs to practice that leadership.
Allow a reasonable time for the transition; six months to two years may be appropriate. But once you start the process, don't leave it open-ended. The new manager needs to know when he or she will formally take the helm and so do the employees. Otherwise, everyone will continue to defer to you and management may break down.
Whether your successor is an employee or a family member, you need to draft and sign a business agreement to clarify:
• Who is responsible for what?
• Who owns what assets at what values?
• How to handle banking and income distribution?
• Who controls access to information (such as records and financial statements)?
• Any conflict resolution that may be needed.
• How the baton will actually be passed, including buy-sell agreements and contingency planning?
Throughout this process, you should rely on your financial advisor for guidance and recommendations. Transitioning a business can have complex financial implications, and even a good business planner can benefit from a financial consultant who may be able to make suggestions about insurance, estate planning, wealth management and other issues the business owner may not have considered.