It’s a simple fact. You won’t be running your business forever. Perhaps you envision one of your children taking over the business at some point in the future. But even if that comes to pass, there’s no guarantee of success. Fewer than one in three firms (30%) survive the initial succession and only about one in 10 make it past the second generation.1
Why such a low success rate? Insufficient planning and preparation.
Successions are complex undertakings that require years of preparation to maximize the probability of success. Not only do you owe it to your family to ensure they’ll receive the equity you’ve worked so hard to build over the years, you also owe it to your employees to provide a viable financial future. Successfully transitioning your business is something you should begin planning for a decade before you leave—not when you’re 6-12 months from retiring.
12% the number of family businesses that survive the second generation
3% the number that make it past the third generation1
If you know where you want to end up, it will be far easier to devise a plan to get there. When do you want to retire and what type of retirement do you envision? Would you prefer to gradually pull away or make a clean break? What actions can you start implementing to minimize the impact of your future departure on your organization?
Put more structure behind your plan
The following questions are designed to help you begin thinking about some of the more pressing issues surrounding the future of your business without you at the helm:
- Have you made an effort to decentralize key decision-making or do you still call most of the shots? What steps could you take to be more collaborative with future leaders of your firm?
- How much are you “the heart and soul” of your business in the minds of clients and vendors? How deeply would their confidence be shaken if you were suddenly gone? What can you do to begin lessening that impact?
- Do you have an accurate estimate of your business’ value? As part of your succession plan, how much of that value are you willing to give up and when?
- Have you identified either an internal or external successor and is that individual (or individuals) aware of your plan and timetable?
- If you have partners, is there a formal buy-sell agreement in place? Is it funded and does it cover a variety of potential events (death, disability, retirement)?
- If you plan to sell internally, how will the purchase be funded and over what time period?
- What plans can you put in place to help hold on to key employees who won’t be owners of the firm?
- Will the terms of your succession plan provide enough income and liquidity when you retire?
By starting to think about these questions now—while you still have plenty of time to change course—you just might make a world of difference in the sustainability of your business for generations to come. Crafting a successful plan takes time and effort, but working with an advisor who understands how your business and personal concerns intersect can be a tremendous help to you and your family.