Sunday, August 9, 2020
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Succession, Step by Step

More than just an estate plan, succession planning is the marriage of business strategy with family strategy. It’s a planned, and hopefully gradual, transfer of the business ownership, authority and control, rather than of just personal wealth or assets. Therefore, the family business leader who thinks that an estate plan can take the place of a succession plan is mistaken indeed.

Ideally, succession plans are the result of years of work and, additionally, take years to put into effect. Even those who start ten years in advance of a planned exit will likely find that they did not start too soon. The process of succession planning is arduous and time consuming, and may even lead to tensions in the family. However, with enough open communication and preparation, the family – and the business – will be better for it in the end.

Developing a formal succession plan provides a number of benefits for the family and the business. For example, it can help reduce the tax burden created by the transfer of ownership, help maintain the firm’s stock value, promote continuity and stability for the business and help to preserve a consistent vision and strategy. Here, we will outline one way to implement an effective, staged, well-planned transition of ownership for your family business.

Step One: The Introduction Phase

Truth be told, this phase begins when you first open your doors as a family business – or have children, whichever comes last. Even when your children are young, they begin to get familiar with your business, and as they grow, they may become interested in following in your footsteps. This phase is the period of time when your potential successors learn about and eventually become involved in the business, gaining solid work experience in your firm.

As this is happening, several other activities should be going on at the same time – primarily, extensive planning. As your potential successors are growing in their business roles, you should be developing strategic plans and policies covering a variety of areas:

  • Estate plan
  • Long-term strategic plan for the business
  • Family strategic plan and employment policies, incorporating family member goals
  • Family mission statement based on family beliefs and goals
  • Leadership development plan and career path descriptions

These plans and polies will help guide each family member as they grow in the business and will help you base your ultimate succession plan decisions on sound factors such as leadership skills and work experience, rather than simply on birth order.

Step Two: The Selection Phase

By this phase, the future successor should be apparent, based on skills, desire to lead the business, and work experience along with an understanding of the long-term strategy of your family business. This phase may be the most difficult for family business leaders, because there will be a great deal of anxiety in making a choice that many fear will disrupt family harmony. However, with proper planning and open communication, family business leaders will find that making a choice based on objective criteria will always have the best long-term result.

The idea is to match the successor to the family business strategy and the role he or she will fill. To help you undertake this challenging task, it may be helpful to write a job description based on not only what you already do for the business but also what you anticipate will be required of the business leader in the future. Then, as you review these skills and attributes one by one, determine who best matches up to the job requirements.

Step Three: The Succession Plan Development Phase

Once you decide on a successor, it’s time to develop a written succession plan. Designed to ease concerns and smooth the process of transition, this plan should provide specific guidelines for:

  • Who will take over family business ownership and in what portions
  • The types of ownership each future owner will have – voting rights, beneficial interests, etc.
  • Which owners will assume active business roles and which owners will assume inactive roles
  • Compensation
  • Gradual transition of roles and responsibilities, along with a timeline
  • Business-wide communications plan to convey confidence in succeeding generation
  • Exit plan for senior generation

Step Four: The Training Phase

With a finalized succession plan in place, you can begin the task of training your successors in the specific role(s) they will take on. The current leadership team should be heavily involved, but you may also wish to enlist the service of a non-family member, either an employee or a consultant, who can provide additional points of view and expertise. During the training process, the successors should take on more and more responsibilities and be assigned more and more challenging goals. Doing this will help confirm or call into question the merit of your decision and will shed light on your candidate’s leadership abilities, problem solving skills, communication skills and ability to work under pressure.

During this phase you should be introducing your successor as such to your employees, your suppliers and other outside business contacts, as well as to key clients. This will help build relationships between your successor and those essential to the success of the business.

Step Five: The Transition Phase

This is the phase in which ownership and official leadership duties are systematically shifted from the current generation to the next. It is important to have clearly defined and delineated roles and responsibilities, giving your successor clear authority in a variety of areas as you maintain a measure of control for a brief period of time. During this time, the senior generation leaders may wish to stage several absences to provide opportunities for the junior generation to lead by themselves. Ultimately, this phase ends when all authority and ownership is passed to the successors. Such a transition should be final, and although the entire process to this point may have taken years, this specific step should be done in a timely manner so as not to cause a sense of endless uncertainty.

Step Six: The Exit Phase

At this point, the senior generation should withdraw from active participation in the business and remain committed to the succession plan. It is very important that as the senior generation leaves the business, they become involved in other activities, such as providing consultant services, writing a family business history, managing a family business foundation, mentoring and the like.

Naturally, this is also a very difficult phase, one in which many exiting business owners can feel somewhat lost. They are faced with a variety of fears and feelings of loss, and it is often with great reluctance that a family business owner lets go of his or her business. However, with a sound retirement plan and a methodical approach through this step-by-step process, the exiting generation can leave the business in the best of hands with confidence.

Contributing Sources:;;

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