Change of Command
Many of us find ourselves fantasizing how nice it would be to run our own business. In the dream, we’re the most effective and benign boss ever to have run a flourishing operation. And, best of all, when the day’s done, all that’s left to do is to lock up the shop and count the profits.
However, when putting this dream to practice, we quickly awake to reality. Running a business can be a nightmarish enterprise, requiring a huge investment of blood, sweat and tears. In fact, the demands are so great that when it’s time to hand over the reins of the business, you may feel like you’re handing over a piece of yourself. And because it means so much to you, you’ll want to pass it on — fully operational — to a family member who will treat it accordingly.
To make sure this happens, you must develop a plan of succession, clearly outlining who will take over when you retire or pass on. There are so many factors at play that failure to heed them may cripple your effort and put a blemish on your life’s work. Good succession planning is an ongoing process, demanding significant thought and involvement by all concerned.
Why you need a succession plan Conflict resolution
FONT>Many small-company owners are so caught up in the day-to-day running of their business they entirely neglect a succession plan — a dangerous omission. You need a plan that anticipates unforeseen circumstances that may force you to relinquish control: health ailments, your own death or a downturn in business, etc. As well, because family businesses are often run informally, a succession plan puts ground rules onto paper. If you must suddenly give up the business, your successor must follow these rules. You also need a succession plan to ensure that your business falls to a family member or other choice who not only wants it but is also capable of running it. Finally, without proper take-over planning, you can expose yourself to significant tax, estate tax or trustee fees.
When determining your succession plan you must resolve potential conflicts that may exist between all the interested parties: you as the founder, your family, your employees and your work environment.
Founder: Though it’s never easy, you must admit that you can’t run the business forever. Eventually you’re going to have to come to terms with giving up control and involvement in the business. Any jealousies towards your future successor must be laid to rest.
Family: Conflict can arise on several different fronts. Your spouse may not want to relinquish control or your siblings or children may wind up in a squabble over who gets ownership. Failure to resolve conflicts may not only destroy your business, but could also rip apart your family. Employees: Employees often develop a strong relationship with you as the founder and may be reluctant to transfer this trust to your successor. Because formal controls may not have been established, there may also be some fear that employees will not be as highly regarded with your successor as they were with you.
Environment: When handing down your business, the company environment is often the trickiest to maintain. As founder, you will have developed many of the key clients who, upon your leaving, may lose this bond and transfer their business elsewhere. As well, the business culture you’ve developed will bear the stamp of your personality. Without you, these practices may disappear, leaving employees and clients lost.
Steps to succession planning
In building a thorough succession plan, you should cover the following points:
- Educate yourself on the need for a succession plan. This will involve research, discussion and outside assistance.
- Educate your children on your business philosophy. Try to impart to them your entrepreneurial values and give them a thorough knowledge of what it takes to run a business.
- View succession planning as an important long-term process to managing your business. Don’t let it get lost in the shuffle — begin planning early and consult all interested parties. Encourage your spouse and children to participate fully in this process.
- Decide whether your business is a family-first or business-first operation. If it’s a family-first company, you should develop rules and regulations concerning family performance expectations and compensation for those who do not wish to take on the business.
- Determine your children’s abilities. Are they equipped to run the business successfully? Despite being a loving parent, try not to over-estimate their skills.
- Determine and set forth a long-term game plan for future family involvement. This eliminates bitter feelings when the time comes to pass the business on to some members while excluding others. Keep the lines of communication open.
- Prepare a shareholders’ agreement covering buyouts, death and transfer costs. And issue new shares, if at all possible.
- Train your successor beforehand so he or she can step up in case of an emergency.
- Give serious thought to what you’re going to do after you’ve retired and no longer have the business to occupy your day.
- Set a deadline to hand over the company and stick to it.
- Seek professional help from a succession and estate planning specialist.