Family business leaders are integral to the success of their business. Their knowledge, connections and instincts have kept the business going. But is there a business without them? This months article I focus on what family business leaders need to consider and quickly. David Harland – Managing Director
Take a few minutes to work through a thought exercise with me: You’re driving to work one day and someone speeds through an intersection, colliding with your car and putting you in the hospital. How well would your business manage without you?
Consider these questions to help you understand how central your presence is to the long-term success of your business:
- Do my clients do business with me or with my firm?
- Who would step in and take over my duties right now if I were suddenly absent?
- What would happen if no one could reach me on the phone for a day? A week? A year?
- Must I be present for every important decision about the business?
- Am I confident that my designated successor is ready to take over my role?
After years of hard work, your business may be at serious risk if it’s too reliant on your constant presence and management. A Family Business Institute study found that 88% of family business owners believe that their family will still control the business in five years; unfortunately, just 30% of family businesses survive into the second generation. This sad statistic can be generally attributed to a lack of succession and continuity planning.
In the future, the success of your business will depend on how well you have prepared it to manage without you. If you are among the estimated 40% of business leaders who intend to sell the firm to outsiders, prospective owners will want to see strong internal structures and a business that’s succession-ready.
The valuation of your company will largely depend on predictable future cash flows. If buyers believe that the business won’t function well without you, it will drastically decrease the valuation of your company. Too many family business owners have unrealistic beliefs about the saleability of their firms. Formal structures, market dominance, predictable cash flows, and clear business succession plans for key managers are absolutely critical to maximizing the future value of your firm.
If you intend to pass the business on to a family member, succession planning is even more essential to ensure that the firm doesn’t become one of the estimated 75% that don’t survive into the second generation. Advanced planning, training, and preparation are required to ensure that your heir is prepared to take over the top job.
Fortunately, there are many ways that you can make your business more succession-ready:
Implement a transition plan: Every family business leader needs to have a transition plan. It’s absolutely vital to your family’s financial success to plan ahead for the eventual transition of your business. Whether your succession is in internal or external, success requires significant advanced preparation.
Create continuity plans for key employees: It’s critical to plan for the sudden absence or transition of your senior employees and managers. Cross training, written procedures, and advanced planning can help prevent a sudden illness or termination from affecting operations.
Retire gradually: Most business leaders plan to retain some attachment to the business after they retire. Whether it’s sitting on the board or becoming a special adviser, a gradual separation from the business can help you adjust to retirement and ensure that your skills and experience are available when necessary.
If you’ve completed our thought exercise, I hope you’ve come away with some thoughts about how to improve the sustainability of your own business. If you haven’t implemented succession or continuity planning, please make it a priority in 2015. Your family and future self will thank you.
Want a private chat about transition planning? Contact FINH on 07 3229 7333
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