There are plenty of articles that discuss the best ways to take the result of your blood, sweat, and tears (your business) and turn it over to the next generation. But some advisors focus so much on the checklist of steps for succession that they miss the emotional component.
Developing a plan for continuity in business ownership depends just as much on the quality of relationships as it does on signing the right paperwork.
Regardless of which side of the desk you occupy, as a business owner, know that the idea of succession comes with some serious baggage.
The transition from one generation to the next could be an easy next step, with a parent fully trusting that their child has every intention and ability to take the reins and lead the business into the future. Others might not be so sure.
In this guide, we’ll give you the tools to understand the process of succession. We’ll go beyond the basics to identify all of the work involved, as well as the ramifications for business owners and those who stand to be next in line for leadership.
The National Bureau of Economic Research Family Business Alliance reports that 43% of family-owned businesses haven’t crafted a succession plan. If there were no intention to leave the business to the next generation, this wouldn’t be so much of an issue, but three-quarters of those businesses say they’d like to do so.
So how can you know that financial planning for small businesses has been done right? When they are engaging in small business financial planning as a whole, every company should start by having a succession plan in place.
The first step is to explore the roles of various family members as they pertain to the business. Dynamics can be sensitive, but it’s important to ask the right questions before you set your plans in place.
Which members of the next generation might be interested in stepping into leadership and ownership roles? Are they prepared to take on the task? Will there be any jealousy or infighting among siblings?
Even if you feel like you are in tune with these complex relationships, it’s still a good idea to talk through your plans with qualified estate planning attorneys. They can provide valuable insight into the complex factors that may impact your continuity plan.
Even if every family member has discussed the transition in advance and everyone is agreed as to key responsibilities, don’t discount the generational divide.
On the one hand, a founder might fondly recount the experience of building a business from the ground up — perhaps they spent the early years working unpaid so they could retain employees, added in countless hours of their own labor, or having doors slammed in their face when the business wasn’t known yet.
No matter how well-meaning they might be, the next generation simply won’t have those experiences in mind when they think of their role in the company.
If the successors have nothing but memories of success and they’ve never had to worry about small business financial planning, their work ethic might be the polar opposite of their forebears.
This may cause friction down the line as parents might question their children’s’ decisions regarding the future of the company. And while those same parents might have signed away their rights to get involved, it can still cause friction in the relationship.
Ideally, the children of a business owner will be involved in the business to some degree long before the succession plan is put in place. Perhaps they’ve been employed in lower positions to gain experience. This integration into the company is vital.
The skillset of the next generation will always begin to show over time, exposing whether the children are able or willing to step into the shoes of their parents or not.
As you move toward the actual transition process, everyone involved should take a moment to talk to leaders from other companies that have made and acted upon their own succession plans.
Find out about the pitfalls and arguments that cropped up. Experienced leaders may have suggestions about the lawyers and firms that guided them through the process.
As painful as it might be, study the failures, too. Sadly, there are plenty of those examples, as well.
Issues of fairness, especially when multiple heirs are involved, will likely come up in any succession plan. If one child is in a passive ownership position and the other is more active, questions about equity could turn into heated debates. Discussions of who “deserves” greater profits or control can easily rend a company in half. Financial planning for small businesses should take these emotions into account and set a plan in place well before the transition is made.
Ultimately, succession will only happen smoothly if the previous generation can let go of control.
For this reason, any discussions about equity, charitable giving, hiring practices, expansion, mission and purpose, and even branding need to happen early on and be firmly settled.
Some business owners want to continue to maintain a degree of control or involvement in the transition. Any continued involvement in the business needs to be outlined in writing.
Ultimately, however, parents will have to be okay with the fact that they won’t be holding the keys to the business one day. With this in mind, the business should have an advisory board filled with trustworthy people, such as lawyers, accountants, and specialists who can continue to guide the decision-making of the new owners.
Finally, set a date. Looming deadlines have a way of focusing the mind and forcing action. Set a series of smaller action items to handles and dates at which particular responsibilities will be transferred. This can help you to tie your small business financial planning to specific milestones.
At Independence Wealth, financial planning for small businesses is our specialty. We’ve helped businesses just like yours successfully transition from one generation to the next.
Succession can be a minefield, but we have the map to help you get through. No one said it would be easy, but building a business from nothing wasn’t easy, either. When you’re ready, let’s talk. Reach out to us today to learn more about how we can guide your business to success.