8 Tips for Transitioning Your Family Business to the Next Generation
How to Successfully Pass Down Your Company to Your Heirs
It’s not just a euphemism that small businesses are the backbone of America. They employ about half of private sector workers and create two-thirds of net new jobs, according to the data. What’s more, most of these businesses are family businesses that get passed down through the years, tying generations together through the dedication and hard work it takes to keep a business running.
While family businesses tend to perform better than non-family companies during economic crises, most are still incredibly vulnerable from a financial standpoint. This becomes especially true when owners decide to retire, and it becomes time to hand over the reins to a new generation. The process of passing on a business is complex and challenging, but these tips can help make it a bit more manageable.
Tip #1: Implement a Comprehensive Business Plan
The best way to ensure you’re on the right path as you navigate this new chapter in the life of your business is to have a thorough, detailed plan in place. You’ll want to sit down with your family members and determine where the company is currently, where you want it to go, and what is needed to get there. That means strategizing about technology, capital requirements, and any additional human resources your business may need, as well. There’s no detail that’s too arbitrary; the better grasp your family has on what the future direction of the business should look like, the better equipped you’ll be to direct the business as it transitions.
Tip #2: Ensure the Business is Seen as an Opportunity, Not a Guarantee
It can be dangerous if the younger generation thinks that their place in the company is guaranteed simply because they’re a part of the family. Not only does this increase the risk of the business being taken for granted, but you’ll want to be very clear about the employment conditions of your children to avoid giving the rest of the employees the wrong perception. These can be awkward conversations to have, but they are crucial.
Tip #3: Establish a Corporate Governance Structure
The key to a successful company is a professional management system. Ideally, your board of directors will consist of attorneys, accountants, and industry experts, as this allows people outside the family to approach situations with less of a chance that emotions will get in the way. However, including older generations is equally as important, since they know the business best. If your business can’t afford a board of directors with paid professionals, consider building one made up of relatives and friends.
Tip #4: Decide if the New Generation Needs to Contribute Capital
One of the biggest dilemmas that family businesses face as they transition generations is whether the new generation should have to pay capital to buy the business or if they will be gifted company stock. Only your family can decide what’s best for your situation. However, keep in mind that it doesn’t have to be one or the other. Landing on a transition plan that’s some sort of combination of both is a great way to provide the new generation an opportunity to show their economic commitment to the company without having to make significant financial sacrifices that could derail their personal financial goals.
Tip #5: Don’t Forget to Prepare the New Owners for What May Come
With so much taking place during a transition period for you’re business, it can be easy to neglect this important detail. Make sure you don’t forget to train your successors for the position they’re about to acquire – and don’t make assumptions that they already know all they need to. As a business owner, you should create a plan that clearly defines the conditions of your exit, as well as other things that may be helpful, such as whether you will remain as an advisor or continue handling specific duties. Transferring a business isn’t just about naming your children as new owners. You’ll want to start with a change in management first so that you can ensure the new owners-to-be are well trained to lead the business. Once strong leadership is established and your successors have proven themselves to be competent, then you can begin the transition of property.
Tip #6: Don’t Rush the Process
Once you’ve decided to transition your business to the next generation, it can be tempting to want to get the process over with or to simplify areas that are actually quite complex. Try to have the mindset that the transition will take anywhere from five to ten years to fully complete. There are many factors to juggle and significant details to hammer out, so you’re going to want to spend time making sure that you cross all your T’s and dot all your I’s. The more time you spend paying attention to detail, the more confidence you can have that the transition goes smoothly.
Tip #7: Keep Family Issues Separate from the Business
It’s completely normal for families to have disagreements from time to time, and issues are bound to crop up. However, it is crucial to the success of your business that you remove all interpersonal conflicts from the day-to-day operation of the business. You’ll also want to work to build constructive conflict resolution skills so that you’re better equipped to resolve your differences. Otherwise, conflicts risk not only ruining family ties but also damaging the business.
Tip #8: Keep Key Documents on File
You likely have many crucial business documents on file already, but there are a few supplemental documents that your family should keep within easy reach, too, in order to ensure a smooth transition of business:
- Will. This should specify what should happen with the stock should a company shareholder die.
- Code of Conduct. Your code of conduct should establish a pre-determined set of rules dictating how family members within the company should behave, as well as any and all information-confidentiality matters.
- Family Pact. Your pact should delineate any terms and restrictions your family has put in place if/when they want to transfer their shares of stock. It should also make clear any rules to follow if they want to join or leave the company, educational requirements needed, how conflicts will be resolved, and specific company policies about things like compensation and promotions.
Preparing to transfer your family business to the next generation can be a process that presents both challenges and opportunities. Every family business has its own set of industry, ownership, and family issues to overcome, as well as personal and business goals. While transitioning ownership and control can be difficult for any business owner, this transition is even more complex for family businesses since there’s the added challenge of managing family relationships. Be sure that all members involved in the transition commit to respecting one another, to remaining flexible with their personal visions of the company, and to collectively celebrating company wins and learning from company losses.
Passing on a family business is a meaningful, life-changing event. When done thoughtfully, transitioning your family business has the potential to be a golden opportunity to combine business, family, legacy and philanthropic goals after all your years of hard work and sacrifice. We hope the above tips will help you plan a successful transition for your family business.