Every well-governed small business needs a succession plan. – David Harland, Managing Director of FINH
This is doubly true for family businesses, where personal conflicts and emotions often need to be managed. The process is not always easy, but there is no reason you can’t build a great plan if you take the correct steps.
Step 1: Begin early
The more you plan in advance and begin learning the ropes, the more likely your plan is to succeed. Practically, you and your family/colleagues need the extra time to figure out the little details. Who are your successor candidates? What skills do they need to have before they assume control? How do those skills translate to a changing market environment?
You also need time to figure out the legal and tax issues associated with succession and, if it is the right time for the founder, retirement. This means estate planning and equity transfers.
If you just opened your business and the founder is still relatively young, then succession planning won’t be your first concern. A good rule of thumb is to begin the process as soon as today’s leadership has a rough idea of when they want to relinquish control — ideally five or 10 years ahead of schedule.
Family owned businesses can crumble in a generation.
Step 2: Bring in a third-party expert
One reason so many enterprises ignore succession planning is that it can be uncomfortable. The process is full of potential pitfalls and psychological roadblocks unless you know what you’re doing.
For most members of the business, this will be the first time going through a succession.
As such, you’ll likely need someone to guide you through the complexities. Someone whose expertise and impartiality help build trust and settle disputes between members. The third-party expert, whether a hired consultant or a trusted advisor, will help you simplify your goals and implement a methodical, broad-based succession plan.
Step 3: Declare your expectations and family values
Before you can build your succession plan, you need to set the expectations and governing philosophies that guide your enterprise. Family values are central to a family business, and businesses that embrace and openly declare their family values are more likely to succeed in the short term and survive in the long run.
Every decision you make in the succession planning process should use the family values as a compass. Does family unity and collective agreement matter more than generating extra revenue? Should younger generations be forced to work outside the business before they can assume control?
These are hard decisions and they need should be made against the strong backdrop of your family values.
Step 4: Schedule time to discuss and hold meetings about succession
Most business owners and directors are extremely busy. It is difficult to take time out of the day-to-day challenges of business operation, but good succession planning is not something that can be relegated to the margins.
In my experience, well-governed family businesses set time aside for important meetings. You want every influential member of the business and family to be able to speak openly and offer their opinion. You also want the collective approval from a meeting setting to ensure everyone is on board and understands the process.
If you have an expert trusted adviser, I strongly suggest you ask them facilitate these meetings.
Step 5: Develop a written family constitution
The best way to cement your succession plan is to construct it in conjunction with a written family constitution.
The constitution serves two functions:
- Acts as a governing document that promotes ongoing family business continuity. This means establishing a primary plan as well as identifying fall-back plans and means of settling conflicts or making difficult decisions.
- Defines and emphasises family values. Your family values should be made clear and concrete so that everyone — family, non-family employees and directors, and customers — knows what you believe and how you conduct your business.
This article was first published in CPA’s InTheBlack: https://www.intheblack.com/articles/2016/09/26/5-ways-start-small-business-succession-planning
If you are looking for a family business adviser, please don’t hesitate to call us at FINH on 3229 7333.