Your family business has stood the test of time. It may have been started by you decades ago, and now it’s become a source of vast wealth for your entire family. Or maybe it was started long ago by previous generations and then entrusted to your care, just as you will entrust it to your children and grandchildren.
Transitioning the business to the next generation is often easier said than done. According to research from the Family Firm Institute, only one-third of family businesses are successfully passed to the second generation. When it comes time to move to the third generation, only 13 percent of family businesses survive.1
There are any number of reasons why family businesses don’t successfully make the transition to the next generation. The next leader may not have the skills or knowledge needed to run the business. The previous generation may not be able to delegate and relinquish control. Or the next generation simply may not have the interest and personal commitment needed to run the company.
Every family business faces a unique set of challenges and requires an equally unique transition strategy. However, there are a few common principles and best practices that every family business would be wise to at least consider. Below are four tips to help your business defy the odds in your transition:
There are a couple of certainties that you likely already know. First, you will retire someday. Whether because of a personal choice or a medical challenge, it’s nearly certain you will leave the business during your lifetime. The second certainty is that if you want to keep the business in the family, you’ll have to find a successor from the next generation.
With those two pieces of information known, it’s really never too early to start planning the transition. Even if the transition is more than a decade away, you can start thinking about how you would like to be compensated in the transfer, who may be a viable successor and how you can best prepare them.
Don’t wait. It’s never too early to think about the transition.
Interview the next generation.
You raised your children, so obviously you know exactly what their strengths and weaknesses are, right? Maybe not. While you’ve been running the family business, your kids have been learning new skills, gaining knowledge and developing their own ideas. They may have a vision for the business that you’ve never even considered.
Have periodic interviews with the next generation to get a pulse on their abilities and knowledge, and to see where they may add the greatest value in the future. Remember, leadership isn’t only about the CEO. You may find that your niece has a unique creative vision and could overhaul the company’s brand, or that your youngest son has a knack for sales.
Don’t assume you know who can do what. Interview them to scout talents, abilities and weaknesses.
Communicate and document your plan.
The most effective transition plans are documented and thoroughly communicated well before the transition happens. Everyone knows who will assume which role, why it is happening and when the transition will occur.
One of the biggest reasons to document and communicate is to avoid ugly family disputes. A surprise promotion to CEO of one sibling could anger the others, especially if they don’t know the reasoning or what their role will be. Create a written transition plan and then share it with the family to set reasonable expectations and minimize drama.
Follow through and delegate.
Finally, it’s up to you to implement the plan. If your plan is to transition the CEO position to your daughter over a five-year period, you can’t wait until year five to start giving her responsibility. The sooner you start delegating and handing off tasks, the more time she will have to learn under your guidance.
Take vacations and time off. Start working fewer hours as the next generation takes on more responsibility. Resist the temptation to micromanage or undo their questionable decisions. This will be their business someday. Give them the opportunity to take it for a test drive while you’re still around to help.
For more information on how to transition your business, contact us at Bridgeriver Advisors LLC. We can help you and your family develop an effective transition strategy so you can enjoy your retirement. Let’s connect today and start the conversation.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
15929 - 2016/7/28