When it comes to transitioning a family business to the next generation, the numbers tell a pretty sobering story. According to the Family Firm Institute, only one-third of family businesses survive a transfer to the second generation. After a transfer to the third generation, the success rate shrinks to just 13 percent.1
There’s a wide range of reasons why businesses fail after transitioning to the next generation. The succeeding owners may lack their predecessors’ skills and knowledge. They may not have the passion and vision needed to guide the business through difficult patches. Or they may lead the business in an unwise direction from either a strategic or financial perspective.
Of course, some transitions are hampered by the previous generation, not the next one. Retiring owners may resist handing over control, or they may obstruct new efforts or initiatives. They may demand compensation for the business that actually puts the company in a challenging financial position.
As the owner of the business, you have an incentive to make sure the transition is a success. Your employees and customers depend on you, as do the future generations of your family. Additionally, your wealth and retirement income may be tied to the business’s future profitability.
How do you give the transition the best possible odds for success? One thing you can do is start planning as early as possible. That will give you plenty of time to explore all options and identify all possible risks. Below are a few other tips to keep in mind as you navigate your transition:
Interview all possible leadership candidates.
You may think you already know which child or grandchild will take over the business, and you may end up being correct in your assumption. However, it’s important to interview everyone who is interested so you can understand their ideas for the business and keep them engaged in the process.
You may find that a child isn’t right for the CEO position but has some fantastic marketing ideas. You may have a nephew or niece who isn’t right for leadership but can make big contributions to product development.
Even if you know who your next owner is, keep everyone involved. That will help you avoid hard feelings, and it may open up your thinking about the future of the business.
Understand your personal finances.
One of the major challenges in any transition is financing the purchase of the business. You’ve worked hard to build and expand the company, so you deserve to be compensated for that effort. However, the next generation may not have the funds to buy the business outright. Some creative financing may be necessary.
If you have an accurate understanding of your retirement expenses and financial needs, you can better construct a financing method for you and the new business owners. Maybe you don’t need as much money upfront and can take a deferred salary or even a loan repayment. You might be able to accept some compensation as a share of future profits.
The more you understand your needs, the more flexible you can be in negotiating terms with the next generation of owners.
Define your role.
What will your role be after you retire? More important, how will your role change during the transitional period? How will you adjust your responsibilities?
You can’t simply flip a switch and expect the next leader to know how to do the job. If you can gradually transition efforts and responsibilities over several years, you’ll give them an opportunity to learn on the job.
Define your role and put it in writing. Communicate with the entire team as you shift responsibilities. Make it clear who handles which tasks and who is the leader. Then, make sure you stick to your defined role, even if you disagree with the next generation’s decisions. They have to have the opportunity to learn from their own missteps.
Need help transitioning your family business? Contact us at TB Financial Group in Fruitland Park, Florida. We can help you identify your business’s risks and challenges and develop a strategy. Let’s connect soon.
1https://www.bizjournals.com/pittsburgh/stories/2004/09/20/focus3.html
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