The following is a guest post by Geoff Brown, CPA at Bond Beebe Accountants & Advisors in Bethesda, MD.
There are a number of books written on succession planning and transitions in family businesses, and it is impossible to synthesize all of that information into a short blog. So, keep in mind as you read this, that succession planning is a complex subject, and this is intended as a high level overview. In subsequent posts we will discuss particular aspects in greater depth. Following are 10 suggestions to ensure a smooth leadership transition for your family business:
1. Start early; this means when your children are young.
Most business owners don’t plan for their transition to retirement. Either they don’t feel the business can continue without them, or they believe in their immortality, or are afraid to face life without their most trusted possession, the business. If you find yourself in that position, it’s never too early to start. If you are young and your business is successful, consider gathering your key advisors and start the planning process. Remember that nothing is etched in stone – your plan can and should be fluid, and anticipate the unanticipated.
2. Figure out what you want and how to be secure in retirement.
What you may want is to stay in the business until some circumstance prevents you from continuing. That’s probably not good for the continuity of the business, and it may not be what your spouse wants. So, we’ll presume that you, as the business owner, want something different. First figure that out, and then decide how to get there. Often, the issue is that as you and your spouse age, you realize that unless you continue in the business you can’t maintain the kind of lifestyle you both want. To avoid this situation, even while you are toiling away running your business, you also need to pay attention to building the necessary wealth for the financial freedom you need when it’s time to move on.
3. Determine what your kids want. It’s not always what you think or want.
Let’s also not assume that the oldest son or daughter is the logical choice to take over running the business. If you think of your family business as the means by which your family can achieve its dreams, then you’re on the right track. Having discussions about your own dreams and thoughts about the business with all family members should start early. At the same time, allow family members to discuss their dreams and desires as well. Many of us don’t know what we want to do when we graduate from college, and the assumption that we want to join the family business, either right away or even at all is, at best, an incorrect assumption. So, be patient and continue those discussions.
4. Communicate (be transparent).
Great communication helps in any relationship, and we know that many families in business suffer from poor communication. Effective communication also means not only letting others know what you think, but being able to listen to others and appreciate their views, thoughts and feelings. I added this point after “Determine what your kids want” for a reason. While communication is critical among employees, advisors and business associates, your most important discussions take place with the family. Communicate often, and be transparent about your desires, needs and expectations, and those around you will likely do the same.
5. Set the business up for transition.
A strategic plan that reflects the family’s values and mission are important to continuity. Take the time to include key employees, advisors and family members in the process. If you have a board of directors, family council or other advisory body, get their approval. And, review it regularly, making changes as necessary.
If you are planning on selling your business in five to seven years, you need to ensure that you maximize the value for the eventual sale. That same mindset is also true when transitioning to the younger generation, with a slight variation. You want to position the business for continued success under new leadership. So, you will need to maximize its position in the marketplace, flexibility, asset mix, etc. In other words, maximize value.
6. Prepare your employees for transition.
You probably have some employees who have been with you for a very long time and are loyal, dedicated and hardworking. Some may even view themselves as your successor. As you go through your strategic planning process it is important to ensure that they understand and buy into your vision and desires about the company. The worst thing you can do is surprise them by announcing the heretofore unmentioned decision that your son or daughter is about to succeed you in the business. If you are setting the business up for continued success, that step can go miles towards undoing all of that other good work and planning.
7. Choose and train your successor(s).
Your successor may or may not be a family member. Keep an open mind and pick the best person for the role. Your successor may also not be limited to one person. I mentioned a strategic plan earlier. That plan will anticipate who will succeed you and when. Your children may not be interested in succeeding you as the CEO, or they may not be capable. If your best choice is a non-family member it does not mean that the business has to leave the family’s control. If you have two children who are capable of running the business, how can you set it up for both of them to succeed? When choosing the successor, be open to different options.
Once you’ve made your choice, then make sure that your successor is properly trained. What type of degree should they have? What type of experience outside of the family business is appropriate and necessary? What type of experience in the business is necessary? These are all great questions that should be considered and addressed as a part of the process.
8. Who will have ownership and why.
This is a major question for the family with no easy answer. Should ownership be split among all of the siblings, or, just those in the business? Or only the eventual CEO/president? If not done properly, this could create tremendous turmoil in the family, which will likely have a negative impact on the business. Earlier I talked about great communication. It’s important for everyone in the family to be transparent with each other about their expectations, needs and desires. This will go a long way towards ensuring a good outcome with ownership.
9. Consider a board with non-family members.
While you may have run the company on your own, for many years, without the advice and consent of others, that may not work well with your successor. Consider expanding your board of directors to include some non-family members. Do it before you leave so that your successor grows into the concept and accepts it. Include your key advisors and members of management in the process, as well as your successor. Inclusion is the first step in the buy-in process.
Outsiders will bring in a different perspective and experience. They also do not have the bias associated with being a family member, nor do they bring in the family clutter that often gets in the way of making decisions. They will also most likely require greater accountability from the management team. It is another piece to the puzzle that may provide the departing owner with more peace of mind as he/she exits.
10. When it’s time to leave – leave.
For the sake of those you are leaving behind; when it’s time to go, give them the wherewithal to run the business. Don’t give constant advice, don’t undercut their efforts, and don’t stick your nose in where you shouldn’t. In other words, give them a chance. Be supportive of your successor. Offer timely advice and mentor them, but let them run the business.
I read somewhere once that the best transition is one that nobody notices. It’s even better if the departing owner can say goodbye and feel comfortable that he/she did everything they could to ensure the future success and viability of the enterprise. Contemplate what it takes to get to that level of comfort and then figure out how to do it. That’s all part of your strategic plan. Then you can ride off into the sunset – in peace.
Geoff Brown can be reached at Brown@bbcpa.com. To learn more about best practices for transitioning your family business, contact The Curchin Group at 732.747.0500.
Sign up for The Curchin Group’s Family Business Advisor quarterly newsletter to keep up to date on the latest tips and strategies for family businesses.