Of the 24 million family owned businesses in the United States, only about 30% will survive into the second generation, according to The Family Business Institute in Raleigh, N.C. That's a sobering statistic for business owners whose crowning achievement is the company they built. But those who begin succession planning early--approximately a decade before retirement--stand a better chance of passing the business on to their children. Consider the following six steps:
- Decide on a viable successor. You may dream of your son or daughter sitting at the CEO's desk, but before you hand over the keys to the company ask two key questions: Are any of your children qualified to run the business? Are they truly interested in succeeding you? It's hard to remain impartial: An outside family business advisor can evaluate the strengths and weaknesses of any prospective candidate and help throughout the succession process.
- Mentor the next leader. Just because your daughter has led the sales team for 10 years doesn't make her ready to manage the entire operation. Owners should prepare successors over several years by letting them work in different areas of the company, introducing them to important business contacts, involving them in key business decisions and gradually relinquishing responsibilities to them.
- Keep all employees in the loop. To avoid hard feelings and confusion, everyone in the company needs a clear understanding of who will take over the business and how the transition will work. Hold scheduled meetings with family employees and critical non-family staff to review the succession plan, head off any problems and discuss other business issues.
- Create a clear timetable for succession. Without set dates for specific events, employees may be perplexed by the chain of command and owners may linger long after they should've retired. Some dates to nail down include when you will retire and when you will transfer ownership shares.
- Settle on a post-retirement role. Can you envision totally walking away from the firm, or do you want to serve as a consultant for a specified time?
- Coordinate estate-planning goals with the succession plan. It's likely your investment in the business is your largest asset. Therefore, several issues need to be addressed, including the possibility of an estate freeze to limit future capital gains in conjunction with a life insurance policy to pay projected tax liabilities. In addition, determine a source of income for your retirement, such as an individual pension plan or a retiring allowance paid by the company.