Why do business owners find it so hard to sit down and plan for their succession?
According to a survey conducted by a national accounting firm, only one-third of family-owned businesses survive the transition to the second generation. And of these businesses, only one-third survive to the third generation. Pretty poor odds for your grandchildren taking over the family business.
There are three basic reasons why transferring the business to the next generation fails.
Many business owners are too busy, too tired or too whatever to sit down and plan for the transfer of the family business. In fact, it is my experience that most owners wait too long resulting in either a fire sale at the last minute or selling to an unintended third party. Or worse, chaos ensues due to illness or death with no succession plan in place.
Lack of Successors
The second reason for unsuccessful succession transitions is the lack of qualified successors. Business owners who started their business, as opposed to those who inherited a business, are notorious hoarders when it comes to delegating so they often run into trouble grooming a successor. The reins are kept so tight that no one is identified early on and therefore nobody is ready to take over, or worse, the most qualified people leave the business due to frustration.
The third reason for unsuccessful business transitions is poor planning. Some business owners may have a vague idea about what they would like to see, but without a detailed plan and direct communication, it is unlikely that their succession will be carried out correctly.
Creating a Successful Plan
The key to a successful transition plan is taking the time to sit down and plan for succession. What should be my succession plan? Should I sell to my general manager or my children? Maybe my plan will be to run the business as long as I am physically able to do so and then sell. There are no hard and fast correct answers, but clearly the plan that involves leaving all planning to the end may result in insufficient or unexpected results when the business is sold. Planning early on for succession that involves either family members or qualified employees could achieve a better financial result.
First identify if there is a suitable candidate within your organization. Are any family members interested? If so, are they suitable and qualified? If they need more time and experience are you providing the leadership and opportunity for them to succeed?
If no family members are interested you should review the talent you have within your organization. The best candidates are not always the ones that are constantly knocking on your door and driving you crazy for a “piece of the pie.” Consider hiring a human resource consultant to assist you in evaluating the potential of the candidates that you have selected.
Buying into the plan is the next important step down the road of successful business succession. Letting go is the hardest thing that a business owner faces when considering succession. I often hear clients say things like “I’m only 45 years old and not ready to retire yet and if I bring someone into the business that will certainly hasten my retirement.” No plan is perfect and your plan may need periodic tweaking to ensure that it meets or fulfills all of your succession objectives.
There are no rules as to when or at what age a succession plan should be considered and planned. In my personal experience, as business owners approach the age of 55 they appear to be ready to consider succession. Every individual’s situation is different and the succession plan must be customized to each owner’s unique needs.
Establishing a timetable for the succession process is very important. Critical dates to consider are:
- When you are considering retiring,
- Timing of selling the share ownership of the business.
There are many planning techniques that can provide you with control over the business after you sell your equity interest.
– Jeff Carbell