According to research from the Family Firm Institute, only one-third of family-owned businesses are successfully transitioned to the second generation. And only 13 percent of those businesses make it to the third generation.1
Why do family businesses face such long odds? There’s a variety of reasons. The first generation may have unique skills and knowledge that weren’t transferred to the next generation. The kids or grandkids may not have the passion or interest needed to run the business successfully. The chosen successor simply may not be an effective CEO.
These are very real challenges, and, as the owner of a family business, you’ll need to confront them if you want your business to last. Either by choice or due to physical or cognitive limitations, it is likely you will exit the business at some point. By starting the transition planning process as soon as possible, you can keep the company viable and ensure you are properly compensated for your personal investment into the enterprise.
Haven’t started planning your transition yet? It’s never too early, even if your retirement is years away. It can be a complicated and challenging process, so you need the benefit of time. Below are three points to keep in mind as you work to identify a successor and organize a transition:
Interview the next generation.
You may think you know who your successor is, but do you truly know the skills, talents and ideas of each member of the next generation? Transition planning isn’t just about identifying the next CEO, but rather the entire leadership structure. It’s about taking the business into the future.
There may be members of the next generation who aren’t right for the CEO role but could contribute in other ways. For example, maybe a younger sibling has very compelling ideas for new products. Maybe a niece is talented and creative and has a passion for rebranding and marketing the business.
Conduct interviews to identify skills and talents. Then brainstorm how you can integrate all of the members of the next generation into the future leadership structure. The more passion and innovation you can get from the younger family members, the better off your business will be.
Determine your involvement.
How involved do you want to be after you formally transition the leadership role? Do you want to stay on as an adviser or a consultant? Or do you want a clean break so you can enjoy your hard-earned retirement.
It’s hard for members of the next generation to know their role if you don’t know what you want your role to be. They will likely defer to you out of respect, so make it clear what the limits will be on your involvement. You want your successors to feel confident acting and making decisions. Let them know when you will be involved and when you won’t.
Document and communicate your plan.
Once you have reached a decision on how and when the business will transition, and who will fill the leadership roles, put that plan in writing. Then communicate the plan to all relevant family members.
Clear and frequent communication can help you avoid and minimize some of the hard feelings and disputes that often rip family businesses apart. If there is someone who you think may be disappointed in your plan, consider talking to them individually. Explain your thinking and how they can best contribute to the business going forward.
The last thing you want is for your plan to be a last-minute surprise to anyone. The earlier and more frequently you communicate, the easier the transition is likely to be.
Ready to start planning your retirement and your succession? Let’s talk about it. Contact us at Jerry Adams Financial Strategies. We welcome an opportunity to help you keep your business in the family for generations to come. Let’s connect today.
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