Many business owners dream about the day that their children will take control of the business. When the children have had the proper training and experience, seeing them take over and successfully run a business can be one of the most gratifying experiences for a business owner and parent. However, a family transition requires proper succession planning in order to ensure the business remains prosperous.
A family transition is a traditional model where a business is passed on from parents to children over the generations. A full 25 – 30% of businesses still pass on in this fashion. The advantages are very simple – the children typically learn the business from the ground up, and have had a part in the growth from the beginning. If they have been groomed to take over, they should have the skills and experience to run the business.
Many business owners want their legacy to continue. The risks, of course, are just as apparent – perhaps the children don’t want to take over, or perhaps they are not as capable as their parents. Unfortunately, according to BDO Canada, only one-third of family-owned businesses survive the transition to second generation, with just a third of these getting to the next — a mere 1 in 10 chance of the business surviving for three generations. Often, the reason is insufficient planning.
If you are a business owner hoping to pass your company on to the next generation, a few key considerations can help you successfully navigate the transition while maintaining family harmony.
Individual Capabilities
Family businesses that operate as a meritocracy are typically more successful than those that promote based on family relationships alone. Defining and documenting what you expect of your children and the future of the company is an important first step in succession planning.
Strategic Planning
To create an enduring business, your vision should align with the plans your children have for the company. The long-term success of a family-run business often requires a careful balance between adhering to tradition and embracing change. Therefore, it is important to discuss plans with your children for keeping the business modern without deviating significantly from the company’s and family’s core values.
Financials
No succession plan is complete without determining the best way to transition ownership. Regardless of what you decide, a comprehensive plan should be designed to serve the interests of all parties—including your estate. While there is no single transition plan that is right for all families, the most effective plans focus on maintaining family dynamics while allowing the family members most active in the business to continue in their roles without unnecessary interference from others.
Passing on a family business is a major, life-changing event with a host of complex issues and potentially difficult decisions. While it may result in family strife, if done well through proper planning, it also has the potential to be a golden opportunity to realize business, family, legacy and philanthropic goals after years of hard work and sacrifice. Involve your advisors; accountant, lawyer and a business intermediary to help you define how and when best to transition your business.
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