Family businesses make up 50 percent of the United States’ gross domestic product and generate about 60 percent of employment, according to a recent article in Forbes. Yet only about one-third of all family-owned businesses successfully transition to the second generation.
“The most important thing to understand is that succession planning is not an event. It’s a journey that takes several years,” says Kelly LeCouvie, a consultant with the Family Business Consulting Group Inc., based in Toronto.
According to LeCouvie, there are seven key steps to successful succession planning:
1. Build your journey’s road map
Family and key management should plan together, beginning at least five to seven years before you want to retire, LeCouvie says. This is when the company identifies what the business’s key strategic challenges are today and what they are likely to be in the future.
Consider those future challenges when choosing a successor, and identify what the optimal leader of the future business looks like. “The founder should not be searching for a mini me,” LeCouvie says.
2. Assess the next generation
The future leader may not look like any of your children. “If your eldest child is 22, he or she is probably not ready to run the business,” LeCouvie says. You may need an interim leader until the second generation is prepared.
Create specific development plans to prepare the next generation for leadership, including identifying mentors or classes and conferences focusing on family business management.
3. Create transparency
The greatest indicator of successful transition is communication. “There must be no surprises,” LeCouvie says.
Small family businesses might choose to meet as a family quarterly, while larger families may logistically be able to meet only once or twice a year. In these meetings, LeCouvie says, “Discuss important matters related to the business and the family, for example, business strategy, how key management is doing and what the next generation might need in terms of development.”
4. Determine what you need
Founders need to come up with a clear plan for what they’ll take with them and what they’ll leave behind.
This should include a cash-flow plan that helps ensure personal financial security as the business continues, as well as an outline of what decision-making roles the founders will keep, what they’ll delegate and what they won’t meddle in—with a very specific timeline.
LeCouvie also recommends defining what the company’s success looks like. “Identify key milestones and what to do if those milestones aren’t reached. Will you step back in?”
5. Get a shareholders’ agreement
“If you give your company equally to your three children and one of them decides he wants his money and wants out of the business, that could devastate the company,” LeCouvie says.
A shareholders’ agreement established with your attorney specifies how a shareholder can exit. “For example, the person who wants out might be required to do so gradually,” LeCouvie says.
6. Make your own plans
“Many entrepreneurs don’t have any hobbies, so this transition can be really difficult,” LeCouvie says.
Ask yourself what you want your personal legacy to be, she says. “Do you want to give back to the community? Serve on other boards? Support other entrepreneurs? Answering such questions will help you move away successfully,” she says.
7. Get advice
There are many diverse issues involved in succession planning. You may want to consult with professional business planning services to help ensure that you and your business are prepared for a successful future.
Planning ahead will not only make your transition out of the business easier, it will put the company you’ve worked so hard to create on track to a bright future with the next generation of your family at the helm.