Opinions expressed by Entrepreneur contributors are their own.
Running a family business can be an exciting and rewarding experience, but it can also come with its own set of challenges. Your family’s company may have survived the high failure threat that hangs over the average small business, but you’re not necessarily safe yet. Only 30% of family-owned companies pass from the founders to the next generation, and just 12% of those last into the third. If you want to be on the positive side of those numbers, you need to start planning the succession almost as soon as you start or acquire the business.
The process requires transparency and honesty, starting with a question so fundamental you might think it goes without saying. But, as many have learned too late, the trouble begins when you let something go without saying.
Do your kids even want the business?
I’ve known business families who never talked about succession until it was time for the founders to retire — and only then did they learn the kids didn’t want to assume ownership. I had a friend who was in the printing business. Over 30 years, the husband and wife built up a successful operation that included over 20 employees, two locations and real estate. When it came time to exit, my friend said his son, who had been working in the business for almost 10 years, was going to take over. After further discussion, he realized he had never asked his son if that was what he wanted. Come to find out, his son did not want to be a business owner. He saw the stress and impact it had on his parents and family and decided it was not for him. My friend had to find a new exit plan at the last minute.
Sadly, for the founder who dreams of building a legacy for decades to come, this scenario is becoming increasingly common. Just as millennials and Gen Z often pass up their parents’ antique furniture and collectibles, many are declining to inherit their companies. More than financial or management problems, I think this explains the low generational succession rates for family businesses.
Related: Every Business Owner Needs an Exit Plan — It’s Time You Develop Yours.
Just look at how differently the generations have steered their careers. While Baby Boomers tended to stick to a single path throughout their working lives, Gen X took a few detours. Millennials and Gen Z are veering completely off the route (if they even had a defined journey, to begin with), so it will be challenging to get one of them to make a lifetime commitment to running the family company.
If you plan to pass the business to your child or another descendant, you cannot assume they’ll take it and do so willingly, not from a sense of obligation. You can’t assume your children want to take over; you must let them know it’s an option for them.
Conversely, I recently spoke with a second-generation owner who’s been working with his father for ten years with every intention of taking over, but he still doesn’t know the plan because his father hasn’t shared it with him. In this situation, we coached the second-generation owner to speak to his father regarding the details of the exit phase. These details included the value of the business, the expected down payment the son would be required to pay his father, details of ongoing payments and benefits for his father once he exited and what the transition and handoff plan was. Even if family members have the best intentions when going into a transition, these details can cause distress and arguments, so it’s best to go into the process with a clear and detailed plan.
Once all parties are clear on keeping management in the family, it’s time to create the plan. Here are five tips I have personally found to help foster a smooth succession plan.
1. Be fully transparent
A successful transition is all about transparency. The new management must know the company’s current financial health and what is projected for the future. There could be legal issues, off-book deals with employees or other matters they don’t know about. All those conversations—the good, the bad and the very ugly—have to take place while you’re going through this succession planning process. When people don’t have these discussions, it changes the whole dynamic of a family.
2. Meet with a succession planner
The first step is to engage a business analyst who will size up the company and suggest strategies for passing it on to the subsequent owners. An advisor specializing in family businesses can help you navigate the often emotional issues unique to family ownership. The advisor will take you through these heavy conversations, and from there, they’ll bring in additional experts, such as tax and estate specialists.
The advisor’s first step may be to take the planned successor aside for a frank conversation: Is this what you want to do? Can you find passion and purpose in this and have fun? If the answer is yes, then it is time to get down to business.
3. Set a timeline
Start with an agreed-upon timeline for the succession. Ideally, it should cover four or five years before the handover occurs. Be clear and straightforward about everyone’s roles, what they will be responsible for and when their duties will kick in. When will the current leadership step back, and how will their replacement transition in?
The timeline should include financial dates such as valuation, payment schedules and equity release. Decide if the second generation will buy 100% of the company on day one or if the purchase will be spread over several years.
4. Have a backup plan
You should always have a Plan B, especially when it comes to a family succession. If your son becoming CEO after you is Plan A and he tells you he would rather pursue art, that’s probably a sign that he’s not going to thrive as CEO. Who or what is Plan B? It could be another family member or even someone who’s not in the family.
5. Consider selling instead
Even if your son or daughter is willing to take over, financial considerations may preclude that. What if you’ve built a phenomenally successful business that’s worth millions? You are not just going to give the company to your successors, but can they access the cash they need to buy it? The wisest course may be to sell the business at full value.
Passing on the family business may fulfill your dreams of legacy, but if the next generation is not ready or interested, your legacy will only be tarnished.
The best transition tool: Talking it out
It’s good for multiple people to sit down and talk all these issues out. The best family transitions I’ve seen are when the second generation starts working in the business very early on, so they get an idea of what the day-to-day is instead of being thrown into the company as their parent(s) are preparing to leave. One of the best examples I have seen is with a respected founder and CEO who had his sons and nephews start working in his business very early on. One worked in a franchisee’s office selling signs, others interned and all worked up through the entry-level sales department. Now, with each of them having almost a decade of experience in the organization, they have been elevated to leadership positions. Their experience of rising through the ranks has given them a full 360 view of how the entire company works and a respect for each person’s role. This has made them significantly better leaders and successors than if they had just stepped in later in their careers.
If you know early on that your descendants would rather do something else, you have time to find the right person to continue what you have worked so hard to build.