03 Mar 2023
Developing A Business Transition Plan for the Next Generation (Part 1 of 2)
Most likely, you are thinking about developing a business transition plan for the next generation if you have successfully built your family business and hope to one day pass the business along to your kids.
After many years of operating your business, you are now seriously contemplating the transition of that business to the next generation as part of your overall family wealth transition planning. In many cases, the family business represents the primary basis of a family’s overall wealth.
The business generates the funds that often financially support two or potentially three generations concurrently. Your business transition plan will no doubt be one of the most important events you have ever had to deal with.
In part one of Developing a Business Transition Plan, we’ll cover:
- Your Legacy
- Setting a Transition Date
- Selecting a Successor
Your business is a source of tremendous pride, with family members feeling a deep emotional attachment to it. They, like you, view the family business as an important extension of themselves.
Some family members may have worked alongside you now for several years with the view of one-day stepping into ownership and leadership of the business.
When the time comes to consider retirement or handing over the management and stepping away from the business for whatever reason, it’s only natural that your first choice is to look at potential family member(s) to assume the ownership and leadership roles.
This transferring ownership and leadership from one family generation to the next is certainly possible within your business transition plan, but it may be more complex than you realize.
The transition requires careful planning to ensure all goes well and that the business continues to be successful for the next generation of owners.
Unfortunately, the majority of business transition plans are not that effective or well executed.
Statistically, more than 50% of business transfers fail within three to five years when passed on to the second generation and less than 20% will succeed when transferred to the third generation.
These potential transition failures can significantly impact the continued wealth and prosperity of future generations.
As you start thinking about your business transition plan, it is also important to consider the impact of ownership transfer on non-family members actively involved in the management of the business.
Every outgoing owner has been the leader of the business for some time. They have usually developed trusted personal relationships with key management personnel. These relationships need to be taken into account.
An abrupt change of ownership could irreparably damage these important linkages – and threaten the continuation and roles of those key individuals in the family business.
Finally, there are many other issues related to the transfer of ownership, from legal and taxation issues to the fundamental need to transfer knowledge about running the business.
Properly addressing these issues will be smoother if your business transition plan unfolds in an orderly way, and over a longer period of time rather than a short point in time.
To provide the best opportunity to successfully transition the business, the owner and their family need to recognize the importance of understanding that a business transition is a “process” and not simply a transactional event that needs to be ultimately executed.
Our post titled, Family Business Transition Planning discusses this in more detail.
Setting The Transition Date Well Ahead of Time
The first step in the business transition process is to determine a date for the ownership transfer. This is a “working” date and need not be absolute. It functions very usefully as the date that transfer plans are made and structured around.
The transfer of ownership date could be a milestone, such as the owner’s 65th birthday, or an anniversary, such as the owner’s 40th year at the helm of the business. The important thing in setting the transition date is to ensure it allows a period of years, not months, for the transfer to ultimately take place.
Selecting Your Successor
In selecting your business successor, apply similar principles as if you were choosing that person from a group of non-family applicants.
Too often the unique dynamics of a family result in the wrong person being chosen to succeed an outgoing owner – leading to the eventual demise of the family business.
It is vital for business owners to be honest in determining not only the strengths but also the weaknesses of family members as potential successors.
The selection process must exclude emotional attachments and potential issues such as family loyalties. You can then base the choice on the business acumen and management abilities of the family members under consideration.
Here are some of the questions you’ll likely need to address and resolve:
- Do they have enough business experience to lead the enterprise successfully?
- What level of commitment does this person have to the business?
- Are their management skills at a level that will allow them to run the business successfully?
- Will they be able to do more than just administer the business; can they develop and grow it?
- Are they really the best person for the job – or should you consider hiring a non-family member of the team to lead and manage the family business for the family ownership group?
Your business transition plan will help you to carefully, and thoughtfully, choose your successor. Now you need to prepare them for the important role they will soon assume.
In our next post, Part Two of “Developing a Business Transition Plan for the Next Generation,” our Manning Elliott team will look at the following:
- Addressing your successor’s business skills and business acumen.
- Further education - what to do when they have areas of knowledge and/or experience that need enhancing.
- Coaching and mentorship.
- Plus, we’ll also discuss, for your consideration, the idea of setting up a family board for the transition.
Other key topics we’ll cover include funding your retirement through the realization of value from the business, and taxation and estate planning issues.
Don’t miss any of this, coming up in Part Two of Developing a Business Transition Plan for the Next Generation.
If you are thinking about or currently working on your business succession plan and need assistance, please contact Rick Gendemann, one of our business succession leaders. We look forward to the opportunity to connect with you to discuss your transition planning issues and address how we may be able to work with you and your family on developing and implementing your successful business transition plan.
Rick Gendemann, CPA, CA, is a Business Advisory Leader with Manning Elliott LLP. Rick can be reached at (604) 557-5760 or email@example.com