Although the thought of getting out of the business is rarely at the forefront of a business person's mind, succession planning (an "exit strategy") is a critical component to any business operation---especially in a family business. By understanding a few common strategies for family business succession, family business owners can help ensure a smooth transition that does not disrupt operations.
Document The Transfer Of Power
Succession in a family business is rarely as simple as a retiring father being directly replaced by his eldest son or daughter. Family businesses must take the management style of each family member into consideration, and carefully select a future leader based on management styles that closely adhere to established and proven practices. If power is transferred to a family member with radically different views from the retiring leader, the business operation could change considerably, sometimes enough to derail an otherwise successful operation. After carefully selecting a successor for power, the retiring business leader should carefully and explicitly document the succession plan, then strictly adhere to it (retiring leaders should relegate themselves to, at most, a consulting function). In larger family businesses, the succession plan should also include vice presidents and other positions of power, especially if a sitting vice president or director is to replace the retiring executive.
Document The Transfer of Assets
Executives and other leaders in a family business may possess a great amount of power, but they rarely command the entirety of the business assets. As one leader steps down, the succession plan should be designed to carefully allocate any business assets in order to prevent arguments arising from frenzied grabs at unclaimed assets. In a corporation or limited liability company (LLC), control of assets belongs to the company as a whole, and can be dictated by the shareholders. In this type of operating environment, care should be taken in the succession plan to ensure that no one individual holds a disproportionate number of stock shares. In a proprietorship or partnership, the resigning leader must be especially careful to ensure assets are divided equally and fairly among the remaining family members, as those who feel slighted by the distribution may leave the organization, rebel against the family, or assume bitter feelings that can be detrimental to the operation. For assistance in documenting the transfer of assets as part of the succession plan, family business owners should also consider consulting a qualified business attorney.
Consider Selling The Business
According to The Small Business Toolkit, succession in a family business is a tedious process that is difficult to successfully complete; the process is so challenging that fewer than one-third of family businesses are successfully transferred to the second generation, and fewer than 15 percent survive to the third generation. To avert this potential devastation to the family business, some leaders elect to simply sell the entire business to a new owner. If the business is to be sold as part of a succession plan, family business owners should hold conversations with each family member and individually address each family member's concerns. In addition, the intent to sell should be well documented in the succession plan in order to avert any challenges to the intent by disappointed family members.
