Finding a suitable successor in a family business can be a difficult task. In the article, “The Secrets of Successful Family Business Successors” written by Dean Fowler in The Family Business Policies and Procedures Handbook, seven behaviors are identified that can help make the transition from one generation to the next a bit easier.
- Establishing independence
Before bringing family members into a business, individuals should establish their own identity separate from the family business. Consider working outside the family firm to gain technical competency and experience. If an individual decides not to work outside of the family business initially, have the individual take on a specific project with the business to lead and establish their worth. Consider having the family member lead a new venture for a related company.
- Reshaping family communication
Communication between the successor and owner is key. Always address conflict immediately. Both parties should actively listen to each other.
- Demonstrating competency
Successors should take on long-term responsibilities that require leadership, be a project team leader. Successors should participate in 360 degree leadership performance reviews to identify strengths and weaknesses.
- Participating in strategic planning
Successors should work with senior generation on future strategies, not just day-to-day operations.
- Clarifying boundaries
The senior generation must define clear expectations for successors to carry out their roles. Successors must take a proactive role to communicate with the senior generation to ensure all expectations are met.
- Developing liquidity strategies
How will a transition be financed? Consider the following: creating an ESOP, buy/sell agreement between siblings, fund non-qualified retirement programs for senior generation, weigh pros and cons of sale to strategic buyer. Successors should be given the responsibility to meet with senior generation’s advisers and experts to identify best possible options and make a recommendation to the family.
- Assuming financial risk
Most family business ownership is through gifting of non-voting stock. To become a responsible owner, successors must become actively involved in the business. Successors must learn to read financial statements and develop relationships with bankers and trusted advisers. The sign of a good successor is if they are willing to take on personal financial liability to own a part of the business. In one example, a son showed interest in purchasing the business from his father. The son met with bankers, attorneys, and accountants to formulate a plan and then worked with his father to implement the plan.
The senior and successor generations must work together to establish the best plan for both parties. Communication is important and both parties must establish their expectations up front to ensure a successful transition. Successors must be patient as they work through these seven steps with the owners.
If you have any questions about succession planning or any other family owned business questions, please contact our office at 717.761.7171.
ABOUT THE AUTHOR
Ryan B. Brown, CPA, CVA
Ryan specializes in providing accounting, auditing, and tax services in industries including truck dealerships, contractors, nonprofits, and other closely held businesses. As an Audit Manager, Ryan is involved in planning, performing, and supervising audits, reviews, and compilations. He also provides tax services for audit, as well as individual clients.