This post was originally published by Michael Verrill at The Sharp Financial Group.
After years or even decades at the helm of a business, all business leaders must eventually pass the torch to someone else. For business leaders who are also parents, the “someone else” is very often a son or daughter. Unfortunately, despite the idealistic image many mothers and fathers have of passing their business on to a daughter or son, the reality of planning a business succession strategy is far more complicated.
Often, beginning the conversation of succession and estate planning can surface uncomfortable or difficult questions that touch on sensitive subjects. At the same time, this process also involves making many decisions about details that business owners may not have considered through the course of running their business.
The positive outcomes of successfully planned successions are many. The business continues to grow. Long-term employees stay and continue to make meaningful contributions. In some cases, the business may even reach new milestones under a new leader. But the risks of poorly planned successions are real. Installing a leader who has a family relationship to the controlling owner but lacks leadership experience can lead to poor investments, a toxic work culture, and possible departures of long-term employees.
To ensure the transition to a business’s next generation of leaders is planned smoothly, there are three primary factors to consider.
- Evaluate Owner Goals: The first step of succession planning is for the controlling business owner to evaluate his or her goals. Does the business owner want to pass on money through the sale of the business? Or would the business owner rather create opportunities for children and grandchildren to have ongoing employment? Depending on the owner’s goals, it may make sense to begin considering buyout options and preparing the business for sale. In other cases, it might make more sense to set up guidelines for how family members can participate in the business.
- Consider Successor’s Abilities: For some businesses, a chosen successor may have been working in the business for years. They may have both business experience and knowledge as well as cultural capital within the organization. But in other cases, a business owner’s child may not have the experience or qualities necessary to sit at the helm of the business. Perhaps there is another person at the firm without a family connection who may be better suited to run the business – with a family member still able to contribute.
- Plan Long-Term Family Strategies: The immediate change to the business may be to pass leadership of it on from parent to child, but eventually grandchildren may want to play a role in the business. Will grandchildren be guaranteed a position at the firm? Will they be entitled to financial inheritance? Are there any strings attached?
With the many nuances and difficult conversations inherent to succession planning, many business owners should consider working with a strategic advisor to offset both the emotional labor of facilitating difficult conversations as well as the logistical headaches of making many decisions that may not have been considered before.
Navigating these questions independently can be stressful, but experienced strategic advisors can assist with overcoming both the emotional and logistical hurdles of transitioning a business to the next generation.