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. The future of your company – your legacy – can hinge on a good succession plan. 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% of all family businesses succeed to the second generation, and of these, only 15% survive into the third generation. So the smart business owner develops a plan with contingencies.
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 those 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.
How to prepare
Whether you intend to transition to blood relatives, 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 will help the process. To prepare for the transition, ask yourself some important questions.
l Have you discussed your vision for the company in a way that is clear to all involved?
l 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.)
l 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?
l Do you have a backup plan if any of your designees decline the responsibility you have in mind for them?
l Is a buyout part of the transition, even to family members or longtime employees?
l 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 need 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, but keep in mind 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 any other employees; otherwise, everyone will continue to defer to you and management may break down.
Business agreement
Whether your successor is an employee or a family member, draft and sign a business agreement. It can be set up to clarify:
l Who is responsible for what
l Who owns what assets at what values
l How to handle banking and income distribution
l Who controls access to information (like records and financial statements)
l Any conflict resolution that may be needed
l How the baton will actually be passed, 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, as a financial consultant may be able to make suggestions about insurance, estate planning, wealth management and other issues the business owner may not have considered.
Marc Pellerin has been in the investment industry since 1979. He is an Associate VP of Investments and a Portfolio Manager with the Advest Managed Portfolio Service team.
He currently manages in excess of $450 million of client assets. Please feel free to contact Marc at his Lewiston office at 1-800-488-4461 or e-mail Marc.Pellerin@Advest.com
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