Succession planning for can be complicated for small family businesses and most don’t even do it. This can lead to frustration for the next generation and sometimes it can even lead family business leaders to wonder if they should pass down or sell.
If you compare non-family businesses with family-owned businesses, you will notice that non-family businesses can have a CEO for about 6 years while family businesses can have a CEO for decades.
Although this can lead to long-term stability and consistency, it can also drive growth flat with a narrow business focus.
Family businesses continue to grow in the United States driven by the 2008 recession. So it’s no surprise that it accounts for 50% of the gross product of the U.S. Further, family businesses are behind 80% of new jobs, so it’s critically important to think about the future right now.
So, if you’re planning on passing down the business to the next generation, creating a clear succession plan is imperative. However, there will be challenges, and all family business leaders need to be on the same page to tackle them effectively.
Family businesses sometimes have a complicated history, but they have grown to be less traditional. Planning can help you overcome many of the issues, so here are 5 things to consider when developing your succession plan.
1. Think Professionally and Look Beyond Seniority
A lot of family businesses tend to just focus on seniority and not the necessary skills and experience needed to take the business forward. As a result, generational transitions may not go smoothly unless it’s approached in a professional manner, according to Andrew B. Clawson of ABC Law in Utah.
Skills and experience can be evaluated as follows:
- Performance assessments
- Skill appraisal
- Review of work history
- Geographic mobility
- Leadership experience
- Ability to solve problems
- Ability to make decisions
- Advancement desire and potential
2. Align Cross-Generational Family Interests
When members retire, alignment of family interests between the retiring generation and the one taking over will be necessary.
Therefore, it’s important to address retirement income and what’s required for the younger generation to take over the reins.
3. Groom the Next Generation
Once a successor has been chosen, they can be offered opportunities for additional development. This can be done by placing more emphasis on the new leader and by doing the following:
- Stretch assignments
- Job rotations
- Profit and loss responsibility
- Enhanced exposure to customers and board members
4. Consider Creating a Buyout Agreement
The true value of a business lies in an earnings capitalization model and not a number on a balance sheet. So, it’s a good idea to take up the challenge and develop a buyout agreement so that the retiring generation knows the true value of their interest in the business.
Further, this can also be viewed as an opportunity to resolve interfamily disputes, inheritance issues, and estate issues.
5. A Non-Family Member Can Also be a Great Leader
A non-family leader can also be a good option to consider as they can bring diverse experience, professional alliances, strategies, and partnerships that are currently lacking in the family business.
It could be a great opportunity to grow the family business and take it to the next level, so this might be met with less resistance than you’d expect.
The family can hold on to their stock, and the non-family CEO can be rewarded via performance incentives.
Troy Martin of Cook Martin Poulson P.C in Utah advises his clients to develop a viable successional plan for a family business requires a lot of thought for long-term business success and sustainability. So, if you don’t already have one, it’s a good idea to start developing it now.