While many owners of family businesses try to convince themselves that they have a succession plan in place, what they really have is nothing more than a vague idea of what they hope might eventually occur. Often, they have dreams of a son or daughter taking over the business, but that rarely proves to be a successful formula. Fewer than one in three firms (30%) survive the initial succession and only about one in 10 make it past the second generation.
12% the number of family businesses that survive the second generation
3% the number that make it past the third generation1
It may be an unsettling fact, but you won’t be running your business forever. You need to plan for that inevitability now – not five or 10 years down the road. Successions are complex undertakings that require years of preparation to maximize the probability of success. Not only do you owe it to your family to ensure they’ll receive the equity you’ve worked so hard to build over the years, you also owe it to your employees to reward their loyalty by providing a viable financial future.
If you know where you want to end up, it will be far easier to devise a plan to get there. When do you want to retire and what type of retirement do you envision? Would you prefer to gradually pull away or make a clean break? What actions can you start implementing to minimize the impact of your future departure on your organization?
Put more structure behind your plan
The following questions are designed to help you begin thinking about some of the more pressing issues surrounding the future of your business without you at the helm:
1. Have you made an effort to decentralize key decision-making or do most important business decisions still reside on your plate? What steps can you take to be more collaborative with the future leaders of your firm?
2. How much are you “the heart and soul” of your business in the minds of clients and vendors? How deeply would their confidence be shaken if you were suddenly removed from the equation? What can you do to begin lessening that impact?
3. Do you have an accurate estimate of your business’ value? As part of your succession plan, how much of that value would you be willing to give up and when?
4. Have you identified either an internal or external successor and is that individual (or individuals) aware of your plan and timetable?
5. If you have partners, is there a formalized buy-sell agreement in place? Is it funded and does it cover a variety of potential events (death, disability, retirement)?
6. If you plan to sell internally, how will the purchase be funded and over what time period?
7. What plans can you put in place to assist in retaining key employees who won’t be owners of the firm during transition?
8. Will the terms of your succession plan ensure sufficient income and liquidity when you retire?
By addressing these challenging questions now—while you still have enough time to alter course—you can make all the difference in the sustainability of your business for generations to come. Crafting a successful plan can be complicated, but working with an advisor who understands how your business and personal concerns intersect can be a great help to you and your family.