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Succession Planning for Family-Owned Businesses: Preserve Your Legacy

When you started your small business, did you think not in terms of years, but generations? Did you view your company as a financial vehicle that would pass from family member to family member long after you were gone?

If so, you’re hardly alone — that’s a common bond among many family-owned businesses.

But passing the family business to someone else isn’t as easy as just handing over the keys. Business succession planning can be complicated — family business or not — so you need to understand what to expect and what you’ll need to do to ensure a smooth transition.

How to Address Your Family’s Small Business Succession Plan

1. Determine What the Business Loses With You

Most small business owners don’t just own the company from afar — they’re a vital part of the day-to-day process. Maybe you develop products, or maybe you’re in charge of sales. Maybe you’re the chef, or maybe you’re the company’s unofficial accountant.

The point is, handing over the reins doesn’t just mean a change in ownership. The business is likely losing a valued employee — and whatever expertise or skills you bring will need to be replaced.

2. Determine Who’s Taking Over the Business

Your succession plan also obviously needs to include who will eventually fill the role. What this process looks like largely depends on when in your life you’re starting to plan.

Let’s say you have no plans to step down for at least a decade, your hiring pool might very well be younger children, nieces, nephews, or siblings. And your focus will be on which candidate(s) can learn all the necessary ropes over time.

But let’s say this move must happen a little quicker — sometime within the next couple years or sooner — your hiring pool will likely include brothers, sisters, cousins, adult children, maybe even a spouse. That might result in some more difficult choices given both their existing skill sets and their willingness to take over the family business.

For instance, what if you want to transfer the business to someone in the family, but there’s no one capable of filling the role yet? Well, you might need to find a placeholder owner and legal representation to craft a contract that temporarily places the business in their care. Or you might legally hand off the business while hiring someone to manage the company in your absence until the owner is ready to take the reins.

Also, you might find that no one in your family wants to take the reins, or decide that the healthy continuity of your business is more important to you than handing it off. If that’s the case, you’ll need to seek out a capable owner from outside the family.

3. Determine What the Business Loses When the New Owner Steps Up

Let’s say, as an example, you decide to pass your business off to your daughter, who currently helps out with some aspect of the company. Taking Step 1 into account, you and your daughter have an important choice to make:

  • Fill some of the voids you’re creating by leaving the business, and hire someone to tackle the responsibilities your daughter will have to give up, or
  • Have your daughter continue tackling the responsibilities they always have, only as an owner, and hire someone to fill the voids you’re creating by leaving the business.

4. Be Mindful of Family and Power Dynamics

The healthiest way for a family to run a business together is by respecting each other’s autonomy and keeping family and business dynamics as separate as possible.

We say “as possible” because humans are humans, and that can be a difficult balance to strike.

But maintaining this balance becomes even more difficult once potential ownership of the company comes into play.

One of the best ways to go about it, if it’s an option, is to ease the new owner in over time. Provide a clear timeline that details which responsibilities they’ll take on, and when. Select certain sets of decisions that will be made apart, but also some that will be made together during the transition period.

The ultimate goal here is ensure a smooth transition, teach the new owner the necessary ropes, and give them time to discover their own management style.

5. Share Your Knowledge

Some level of training should begin the moment you’ve chosen the person(s) you expect to replace you. A few of the most important aspects of that:

  • Directly train your replacement candidate(s) on any responsibilities you have that they will expected to do (or oversee).
  • Write down everything practical you know. Documentation is vital in maintaining and transferring institutional knowledge. Not only can this help educate your replacement even once you’re gone — it can help educate current and future employees.

6. Determine What “Ready” Looks Like

The worst thing for everyone involved is handing the reins over before the new owner is ready.

But what is “ready,” anyways?

Too often, this definition is subjective. Outgoing owners tend to underestimate their proteges’ readiness, worrying (perhaps rightly) that it’s difficult to replace years, if not decades, of institutional knowledge and experience. Meanwhile, incoming owners can sometimes be a bit overenthusiastic and perhaps a touch optimistic about their preparedness.

You want to come to an objective decision. That means both the current and prospective owners coming together to determine concrete measures of readiness — a length of time of experience, experience doing several jobs within the business, or completion of a certification program or even degree coursework.

7. Don’t Plan Alone

It helps to coordinate your succession plan with people who have intimate knowledge of your company’s affairs. But it also helps to get objective advice from a neutral third party — especially one with experience guiding small businesses.

McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that offers custom services to companies across a broad spectrum of industries. We offer a wide array of consulting services to small and mid-size businesses, including advising on succession plans and helping you determine what you want in your company’s next leader.

Learn more about what we can do for your small business. Call us at 440.892.8900 or contact us online today.

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