As a parent, there's nothing better than watching your children succeed. If you're a business owner wanting to pass it on to the next generation, you'll want the same feeling. Giving them an opportunity to take your business to the next level and achieve their own goals is something worth planning for.
A successful family business outlines the company's purpose and vision, identifies competition and finds a balance between personal and business relationships. Transitioning a family-owned business to the next generation presents a number of unique hurdles, including financials, but it also offers amazing opportunities to contribute to your family's success for generations to come.
Succession planning for ownership involves legal matters, including buy and sell agreements, whether it be selling to children, managers, employees, investment groups or an outside competitor and deciding who will own shares. Conversely, succession planning for leadership and management refers to training the next generation in these types of roles. As part of succession planning for leadership and management, the older generation should teach the new to follow the same vision and business goals, while incorporating family values. Experts suggest creating plans and goals in these areas:
• Strategic thinking
Both the current and next generation should create longer-term plans, such as modernizing the business while keeping with tradition, and hiring in areas of weakness.
• Development plans and performance evaluations
Current owners should develop a hands-on experience and mentor the current management team. As a check-and-balance system, try having a family member report to a nonfamily member.
• Managing finances
Current owners should make sure their successors understand everyday financial practices and how to separate personal and business expenses.
The next generation should complete higher education and gain experience outside of the family business to bring new skills back that the business needs. Also as part of leadership and management succession planning, the senior generation will need time to become comfortable with the transition.
Tension could develop if they feel they are being pushed out. Having a clear plan for life after retirement will help to prevent the temptation to interfere. Many business owners have the majority of their net worth invested in the business. If you can't afford to give it to the next generation and they can't afford to purchase it, consider other options (I.e. Leveraged buyout, installment sale, etc.)
Consultation with professional advisers is essential to achieve desired results. Depending on the nature of the business, when children have different skill sets and leadership abilities, avoiding conflict may involve business reorganization, which would allow different children to run separate operations acting as their own profit centers.
• Key employees
A vital element of a smooth transition is retention and continued dedication of key employees. Bringing family members on as owners also has the potential to cause discord. To prevent this, identify retention and engagement plans, consider having employees sign a proprietary information agreement and create incentives for key employees to remain, including forms of executive compensation and bonuses.
The pace at which technology changes, a challenge for all business, is increasing at a high rate with the potential to impact every business. The ability to easily adapt will be crucial to the success of most businesses in the future.
Succession planning is an opportunity for you to plan out what you want your business to look like when you're no longer at the helm. As always, consult with a financial adviser that can help you design and implement a strong plan. Succession planning is a very emotional topic and logic is often tossed out the window.
It's when families aren't proactive that something happens, everyone scrambles and quick decisions take place. We offer objectivity so you can create a succession plan that is workable and easily implemented.
Giving up control may be a difficult process to go through, but giving your children an opportunity to take your business to the next level and achieve their own goals is something worth planning for.
• Kim M. Liva is a senior wealth strategist with PNC Bank.