For those of us running family businesses, the holidays remind us of the many blessings that entrepreneurship affords us. Running a family business can be daunting, frustrating and rewarding at the same time.
Among the most difficult discussions for any entrepreneur to have with his or her family is succession planning. Yet, such an engaged discussion is like a gift one can give to their children, siblings and employees.
There are 27 million closely-held businesses in the U.S. With the baby boomers retiring, 70 percent are expected to transition in the next 20 years. Only about a third of family businesses make it to the second generation, and even fewer (about 12 percent) make it to a third. According to Union Bank, only 44 percent of families who transition a business have a written plan.
A lack of clarity in management leads to dysfunction. As it turns out, most families do not want to have conversations about mortality or illness. Bake in the family pecking order with discussions about money, and you have a recipe for... procrastination.
Failure to discuss such matters can be both financially and emotionally devastating. Much like an estate plan is written to protect heirs from tax implications, there are dire consequences for families who do not discuss the management and financial ramifications of transition. It is simply short-sighted and selfish not to engage in such planning.
It doesn't have to be that way. Creating a succession plan and the precursory financial and estate planning instruments is not unbearably difficult.
Here are 10 steps business owners can take to create a succession plan:
1. Set specific, long-term goals for ownership.
Every business should have a written strategic plan. Within the strategic plan, management can clarify its growth plan, financial targets and transition of ownership.
2. Integrate the transition and estate plan.
A strategic plan and estate plan can and should be built in parallel (although a strategic plan is an evolving, fluid document). Take care in settling any family disputes, as they will only be magnified should the business owner pass.
Transition strategies may include:
- Buy-sell agreements
- Employee stock ownership plans
- Life insurance
3. Seek out the very best advisors.
Having the right CPAs, estate attorneys and transactional attorneys is critical. Also, every exit planning exercise needs a quarterback- one advisor responsible for driving a written project plan.
4. Conduct an evaluation of your management team.
Create a set of management "competencies". Have the management team assess the skills of each manager, or hire an outside firm to study their emotional intelligence and skill level. Create a grid and grade based on the managerial competencies.
5. Be fair.
Never show preferential treatment to family members. It is bad business that will alienate other employees.
6. Make children work elsewhere for at least five years before bringing them into the business.
Children of founders or multi-generational family members face even more scrutiny, and need time to mature.
7. Create a development plan for key family members.
Avoid providing arbitrary promotions to family members who may not have earned them. Instead, put them on an education track, including professional development, so they can hone their skills.
8. Create a robust performance management system.
Train your managers (especially senior managers) on how to hold people accountable to specific performance outcomes. A methodical process will minimize perceptions of favoritism.
9. Identify the successors.
Have frank and confidential conversations with your top people about their career paths. Consider hiring a coach (or have them join an executive group like Vistage) to help develop their skills (I am a member myself). Ensure developing new leaders is a core competency in your company.
10. Handcuff your best people.
Make certain that you have provided incentives for future senior managers to stick around.
As they say, a journey starts with a single step. Don't be afraid to have meaningful conversations about your succession plan. Then go find the professionals that can help you put your plan into action.