When running a family-owned small business, your current sights are set on marketing, sales and finance. However, at some point, you need to consider future plans for the company — retirement or lessening your daily duties.
With proper succession planning, family businesses can avoid significant challenges when transitioning from one generation to the next. To minimize the impact on customers and your family, we’ll review some tips for successful family business succession planning.
Jump ahead:
While most family businesses won’t face the same twists and complications as the Roy family of HBO’s Succession, there are still many unique challenges to overcome.
The emotional dynamics and potential conflicts among family members can make the process complex. Consider some of the following questions as you plan:
Transparent communication underlies succession planning. Regular family meetings and involving all stakeholders in decision-making can improve collaboration, reduce conflicts and make everyone feel heard and appreciated.
The first decision you’ll need to make is whether you want the company to keep the business in the family, sell the business or dissolve it.
When considering whether to keep a company in family hands, it’s crucial to evaluate current operations and the potential interest of a future employee. If a family member or other relative already works with you and has years of experience and knowledge, discussing business succession planning may not be at the top of their minds.
You may learn that ideal or desired candidates may have other career goals; they may not be fully committed to the company’s future. Asking a person to fulfill a role they’re not completely committed to could have disastrous consequences for your employees, your legacy and possibly even your continued financial well-being.
Identifying potential successors within the family is a critical step in succession planning. Look for family members who demonstrate both the passion and capability to lead the business forward.
However, it is equally important to provide them with the necessary training and mentorship. Grooming successors through hands-on experience and professional development programs will better prepare them for their future roles.
Being early in the planning stages of family business succession means you can start to set the stage for a smooth shift — basically, a test run. You can view operations through the lens of the future state of your business. By training and teaching, you can begin to delegate duties, pass on your wisdom and gradually envision how the business will function as you begin to step away.
As you delegate duties, you might find that more than one family member is ready to make things work. That’s good news! Not only do you have someone who may be able to run the show, but other family members can also specialize in various aspects of the business.
A comprehensive succession plan is essential to guide the transition process. Typically, plans should outline:
The plan should also align with the family’s values and long-term goals to ensure a smooth and successful transition.
Family business succession planning involves various legal and financial considerations that must be addressed — such as estate planning, tax implications and structuring ownership transfers. Consulting with legal and financial experts can help you navigate these complexities and ensure compliance with relevant laws and regulations.
Aside from the paperwork, these advisors can offer an objective perspective that can contribute to a well-rounded plan that considers all aspects of the transition. Consider the following:
Talk to your accountant about your strategic planning for the family business. Be sure that there will be no surprises from a business tax liability standpoint. If you’ve stayed on top of payroll, sales and quarterly estimated taxes, that shouldn’t be the case. Forecast future revenue so you have the means to handle additional tax burdens if sales boom. Conversely, assess your available capital in the event of a temporary downturn in cash flow.
Now’s the time to make sure your accounting practices are up to snuff. Ensure you’re managing cash flow well, and that vendors are being paid and customers are paying you. Maintaining quality control over the books will make for a smoother transition as that time approaches.
Address exposures by putting together a risk management strategy. Review your business insurance to ensure that you have adequate coverage and consider filling coverage gaps with updates to policies or other coverages.
Accidents, oversights and injuries happen. Having the proper policies in place to protect your assets will insulate you from a potential financial catastrophe.
It’s possible that no one in your family is interested in continuing the family business, or you don’t feel anyone has the right skills or temperament for it. If so, begin the search for someone who possesses the skills and mindset to maintain or grow the business.
It may be tough to yield to new philosophies or directions, but remaining viable and marketable may lead to a future sale of the business at a desirable strike price. And that bodes well for your financial status and that of your family.
Family business succession planning is complicated. You can help your business succeed by understanding the challenges, fostering communication and collaboration and starting the road to planning for a smooth transition.
NEXT helps safeguard your family business online with quick, easy and affordable business insurance.
We’ll ask a few questions about your business and give you a quote. You can select your coverage options and purchase your policy — all in about 10 minutes. Your certificate of insurance will be available after purchase, and you can access your policy 24/7 via web or mobile app.
If you have questions, our licensed U.S. insurance professionals can help.
Get your free quote from NEXT today.
Next Insurance does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for personalized guidance.
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