10 Tips for Family Business Succession Planning
Family business succession planning can be one of the most emotional and difficult business deals you may ever take on.
What makes a family business unique is also what makes these business transitions the hardest. Business owners are less likely to wear their "business hat" and more likely to wear the hat of "dad" or "aunt," when family is involved.
Which means sometimes, the business depends more on trust, care, and family dynamics than on solid legal structures.
And that's lovely, but if you don't have the same legal structures in place that other businesses have, your trusting and caring family business may eventually hit some speed bumps that may not only hamper your business success, but could also ruffle your family ties.
One area where I often see ruffled family ties and suffering businesses is when it's time for family business succession planning and the transition itself.
To plan properly for this type of transition, it's important to start early. By planning ahead, you can map out responsibilities, maintenance, customer and vendor relationships, and internal relationships, too.
Even if you aren’t planning on letting go of the reins just yet, you want to make sure you have something in place should the unexpected occur, or should you change your mind.
To help make this transition (current, or projected) easier, I have outlined my top 10 suggestions to help you streamline the process.
1. Think realistically about your expectations and goals.
As a business owner, you have put more sweat, blood and tears into your business than anyone else. Owning a business is like having a baby and watching it grow, but at a certain point, you might want to (or need to) let your business move on without you.
Ask yourself:
- How long do you want to continue running your business?
- What will happen to the business if the unexpected happens?
- Who would I want to take over my business should I no longer want to, or be able to, run it myself?
Once you have a better handle on these questions, you will want to have a buy-sell agreement drafted by an attorney, which addresses ownership and control.
**If your business isn’t organized as a corporate entity, you will want to make sure to do so. This will make it easier to have formal structures in place and to plan for transitions.
2. Have honest conversations with those who you feel would be good for the role, and those who express an interest.
Just because you think that one of your next generation family members would or would not be a good match to run your business, does not necessarily mean that they are also game for your plans. Make sure to have candid conversations with those who show an interest, and those who you feel would be the right fit for your business.
And even though you're speaking to a family member or someone who has worked with you for years, be careful not to assume that they have the same vision for the future of your business as you. Include in these discussions the need for commitment and your long-term business goals, to gauge whether everyone is on the same page.
**One more important step to these conversations: Have all potential and interested parties sign a non-disclosure/confidentiality agreement, even family members, to protect any trade secrets.
3. Think carefully and critically about whom you will pass your business on to.
Make sure you weigh all the odds when deciding who will take over the family business. You want to make sure that the person who you select truly understands what it takes to run a business.
Before making a decision, you may want to consider whether they. . .
- Love the business model
- Are capable of being a boss
- Understand the need for potentially working long hours
- Are comfortable with managing relationships
. . . and more.
**Have an operating agreement drafted, which documents the scope of the transition. You should include all key issues in this agreement, including who will manage the business, when and how distributions will be made to the owner(s), and how disputes will be resolved, to name a few.
4. Be a teacher.
You will want to teach your successor family member the ins and outs of your business – and sooner rather than later.
Introduce them to your customers, employees, and vendors so that everyone has a chance to get to know one another before the transition occurs. Gradually allow the next generation to start managing those relationships and easing their way into their new role.
Additionally, make sure that the next generation is aware of their fiduciary responsibilities as owners. It is important to speak with an attorney about what fiduciary duties business owners must adhere to and how to document and handle any abuses of such duties.
5. Learn to let go.
After you have trained the next generation for a year or so, allow yourself time away from the business, whether it is a vacation, time home with family, or practicing a hobby you were too busy to enjoy before.
Make sure that you have delegated duties and responsibilities to the next generation and then give them some time to implement your teachings on their own. Refrain from checking in until you return. This will give you an opportunity to evaluate whether your successor family member is able to do the job without having you around.
Once you feel comfortable that the next generation is ready to take over the business, continue to include outside professionals, such as attorneys, accountants, bookkeepers and financial advisors, in the decision-making process. Make sure to introduce the next generation to your trusted outside professionals, so that they can reach out to them if you are not available.
6. Include the next generation in decision-making and implementation.
Ask the next generation for their input, especially when you feel stuck. This will allow for fresh ideas and new energy to seep into your business, and also gives the next generation a larger stake in the company.
If the next generation is asked for input, they will feel more connected and valued, and will in turn become more invested in the company, too.
**Make sure to keep written records of any new ideas, decisions and implementations, and incorporate them, as necessary, in your operating agreement.
7. Think about the business' long-term financial plans.
If you are in a position to do so, set aside financial resources for the business. This will provide a nest egg for the next generation – and will also put your mind at ease should your business take an unexpected turn.
**Have an estate plan for your business drafted, which might include setting up a trust or other vehicle for your business.
8. Walk away – gradually.
Just because you have started the transition to the next generation, does not mean that you must immediately move on from your position as business owner. In fact, it makes most sense for you to walk away gradually, easing yourself out slowly so that the transition is smoother.
You want to make sure that your customers, employees and vendors feel comfortable with the next generation before you leave, and so slowly hand over those relationships to your successor family member.
9. Make yourself available.
Make yourself available, not only to the next generation, but to your customers, employees and vendors, just in case there are questions or concerns that you might be best able to deal with. You don’t want anyone to feel like they have been left in the dark.
10. Get your legal house in order.
Aside from the emotional and practical side of handing over a family business, you want to make sure that all of your legal documents are properly drafted and executed.
Speaking with a financial advisor and a business attorney will help you make sure you have the proper legal structures in place for a smooth transition.
Moving on is never easy, but planning for the future makes the transition so much easier. Even if you aren’t planning to pass on your business anytime soon, thinking about how and when you will pass on your family business to the next generation is powerful for all family-owned businesses.
For more information, please contact Elena Volkova of Roizin & Volkova Law Group, a corporate and trusts and estates law firm that focuses on business succession planning for family-owned businesses.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
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There is 1 comment left for 10 Tips for Family Business Succession Planning
Elina Brooks said: Friday, March 10, 2023My aunt runs a restaurant business, and it seems like she plans to have my cousin succeed in a place in a few years, so she needs to prepare for it soon. It's good that you mentioned that it's important for us to think about financial plans in the long term and set aside financial resources if we can to put our minds at ease if the business takes an unexpected turn in the future. I'll take note of this while I help my aunt find an accountant who can help with her business succession planning soon.
HBS Staff replied: Friday, March 10, 2023Hi Elina,
Thank you for reading our blog. We are glad you found the article helpful for your Aunt. If you have any questions we are happy to assist.