Succession is hard for any firm, but it’s especially challenging for family businesses. Besides the inevitable financial and legal issues, there are also complex family relationships and emotions to navigate. Perhaps that’s why more than 70% of family-owned businesses do not survive to the second generation. Still, you can eliminate any discord and ensure a smooth, orderly transition to the next generation by planning ahead. Here are five simple steps to succession success:
1 Start early
Succession is a process, not an anointing, says Shelagh Rinald, a CA and family business facilitator in Victoria, B.C. Set a timeline for handing over the reins. Ideally, a succession plan should set out an orderly handing over of knowledge, skills, management and finally ownership over time.
2 Identify a successor
Approach the task as if you’re doing a job search, says Bruce Ball, a tax partner with BDO Dunwoody LLP, in Toronto. First, identify the key skills and characteristics you’re seeking in a leader and then evaluate the list of possible successors. “It could be that the person you thought would be the leader isn’t the right one for the job. Or it could be that he is, but he needs some additional training.”
To resolve disputes, or simply to keep everyone on the same page, hold regular family councils. A trained facilitator can help set the ground rules and keep the meetings flowing, says Rinald, but once families are accustomed to the process they should be able to handle meetings on their own.
4 Formulate a contingency plan
Set out guidelines for what will happen should a key person die or is unable to continue at the business. Consider insurance that provides cash to replace lost revenue.
5 Obtain outside advice
An external board of advisors, or even a trusted friend with business experience can be helpful for some family businesses, providing unbiased input on strategic planning and compensation issues.