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Succession planning:

A guide to passing your family business to the next generation

By Bobbilynn Hollifield
June 3, 2020
transitioning a family business

Transitioning ownership and control of a family business to the next generation is a complex undertaking and can be difficult if not planned carefully. An owner who is planning their exit strategy must enlist a team of experts to make sure all the necessary steps are executed properly so that the business can continue to thrive under the new generation of ownership.

These family business owners must also deal with the added stress of balancing their familial relationships with the preservation of their company’s standards, culture and success that they’ve spent years or decades establishing. But there is also the added consideration on how you’ll communicate the change to stakeholders, including employees, investors, customers and suppliers in a way that will allow them to be part of the process and continue to hold the same level of confidence in the company after the transition is complete.

This article will provide you with some important succession planning guidelines to help ensure a successful transition and future of your company.

Planning for succession

Some of the important considerations of planning a family business transition include the following:

1. Assessing the members of your family to determine who will lead the company into the future.

This involves evaluating the desire as well as the capability of the succeeding generation and preparing to train them to successfully take the reins as head of the company and can be a major challenge.

Maybe your family has several capable members with varying levels of interest in taking a leadership role. Conversely, your family might have multiple members willing to take the reins, but they lack the capabilities needed to run a successful company.

These are common conundrums faced by retiring company owners when they begin creating their company’s succession plan, as they call for judgements to be made that could affect familial relationships as well as corporate success.

2. Understanding the amount of time it takes to finalize the transfer of ownership.

Selling or transferring a privately-owned business involves many complexities related to proper due diligence, including:

  • Complete audit of the business. To ensure the business is unencumbered for sale, a thorough audit is highly recommended, including financial records, contracts with customers, suppliers, etc., litigation, employment information, intellectual property and any other organizational information.
  • Have the business appraised. Learn more about business appraisals here.
  • Legally document all agreements pertaining to the running of the business
  • Broker an agreeable earn-out process. This protects the predecessor as well as the successor and individual stakeholders.
  • Bring the new owner into all business operations for the purpose of educating, training and overall ensuring a smooth transition.

All of these components and related responsibilities can take at least two years, if done with careful consideration and proper preparation. Of course, a transfer can be done on short notice, but it is in the best interest of all parties involved to take the time to carefully plan and execute a well-organized transfer.

3. Working with the successor to ensure a smooth transition, during which time the predecessor or proxy is able to remain in an active supplemental role for a period of time to help with learning and development.

While you’re laying out your strategy for your company’s continuation after you step away, you’ll be contemplating whether or not your next-in-line’s vision for the company aligns with what you have in mind. If that’s not enough to think about, you’ll have to work on creating a balance between your historical way of thinking and embracing the change that will inevitably come as a result of the change in leadership.

The first step here is to have a defined outline of your expectations for the future of the company. This can include planning for educational or other learning opportunities to ensure your family member is ready to lead, enlisting a trusted advisor to help with the transition and delegating responsibilities that are in line with the capabilities of your family members.

To help move this process along, it’s a good idea to discuss your plans for your company with the individuals who will be running it when you leave to make sure you’re all on the same page. Some of the important information things to discuss that are often neglected include:

  • The successor should be involved in all major relationships important to the business - customers, suppliers, employees, legal team, shareholders, etc. for the two years before the transition is complete.
  • The successor needs to have a comprehensive understanding about how the business got its success, how the company was started and how to continue the success in the future.
  • The successor should be briefed on any special - read: unspoken and confidential - considerations to be aware of, including any debts of gratitude to people and firms that helped the firm grow, arrangements with certain members of the staff, etc.
  • The successor must be made aware of past tax or legal issues the firm has experienced in the past if they are to successfully carry the company forward.
  • The successor should be given notes pertaining to any “hacks,” solutions or mental shortcuts that have been learned and utilized over the years that save time and money. Many businesses are successful because the founder found ways to cut through complexities while still delivering high quality work.

4. Building a cooperative team with the family to ensure the company can continue harmoniously and peacefully with the network of support within the family.

While discussing the vision you have of your business moving forward, it’s important to make sure that your wishes for progression without compromising your core values is very clear. Once you hand over the key to the castle, your successor will be in control, but ideally they’ll have respect for your wishes and will do what they can to adhere to them.

Again, and this cannot be overstated, communication is key. Involving your successor(s) in daily operations before the transition is complete will help to put a process into place to aid in decision-making down the road.

5. Building a team of professionals to ensure the overall success of the transition.

Transferring your family business will require a full team of experts, including:

  • Accountant
  • Attorney
  • Business appraisal expert
  • Marketing firm
  • Web design agency
  • Business planner specializing in family business planning
  • CFO/Controller
  • Financial advisor

Planning your exit strategy

transitioning family business

Assuming your exit from the family business is something you’ve considered in-depth, your strategy will provide a sort of road map that can help ensure the financial security of your business in the future as well as contribute to a seamless transition of ownership. Deciding what your vision is for the future of the business is the first step in beginning your exit plan.When you’ve decided to retire or otherwise transfer ownership of the company to someone else, it’s time to start creating an outline for your exit process and your wishes for the company’s trajectory after your departure.

Business advisors typically highly suggest beginning to plan and document your exit steps at least two years before your planned exit date. A successful, well-planned exit strategy can make a huge difference in the company’s future success. Some of the essential steps in your plan should include the following:

  1. Define and document your goals. With input from your business advisor as well as your attorney, craft a clear, detailed definition of what you want for your business after you’ve left. Knowing and understanding your goals for the business, its employees, stakeholders and customers is an important first step in determining the best strategy for you.
  2. Work together with your successor and advisors to ensure that the company’s value as a business can and will remain steady or rise. Your successor should receive the training and education they need to understand the industry as well as the metrics by which your company measures its success. If you’re selling the business, this will be done a little differently, but for now, we’re focusing on transferring a business to family members.
  3. Decide on your exit date. Maybe you’ve already unofficially decided on a time frame within which you plan to execute your plan, culminating with your retirement or other next venture. If not, this is the time to do so. With a projected exit date in mind, you’ll find it easier to outline, coordinate and execute your exit plan. Planning your exit with enough lead time will allow for any variables that come up to be dealt with without derailing your plan completely.
  4. Build flexibility into your plan. When you’re creating your plan, it’s important to remember that nothing is carved in stone unless you want it to be. There’s something to be said for flexibility in planning, as proven by scores of business owners who have successfully transitioned their companies to the next generation despite the challenges relating to unexpected or unprecedented changes in the market or industry.

Completing the transition

transitioning a family business

Transitioning leadership will be a balancing act of maintaining relationships within the family and keeping the business running smoothly throughout the process.

Every business is different, and every family is different, so your succession plan will need to be comprehensive and carefully crafted to make sure that every base is covered to your satisfaction. If communication is open and transparent and plans are laid out and agreed upon, it will go more smoothly - though what works specifically for your family will be for you to determine. Some techniques typically used in family business transitioning are as follows:

  • Create a grantor retained annuity trust (GRAT). Learn more about GRATs here.
  • Transferring your business shares: You can transfer your shares gradually in annual tax-free chunks, as long as the annual transfers don’t exceed $15,000 each. Alternatively, if you plan to leave ownership of your business to a family member in your will, your beneficiary can be exempted from estate taxes on the business if its value is below the current exclusionary gifting threshold (the 2020 limit is $11.58 million).
  • Arranging an owner-financed sale to your successor: Essentially an installment plan, the buyer (successor) makes payments to the owner until the full purchase price is satisfied.
  • Utilizing life insurance as a planning tool: Life insurance can be earmarked for paying estate taxes, if applicable.

Often, business owners are unaware or undereducated about the potential tax implications when transferring ownership of the business — or any type of significant equity — to family members. It is crucial, however, to understand the potential tax-related issues related to an equity transfer and plan ahead to ensure the smoothest transition possible.

Marketing after a change in ownership

family business transition

Whether you decide to rebrand the business or continue the business’s current branding, it’s a good idea to keep your customers, stakeholders, suppliers and employees in the loop as far as ownership of the company goes.

When a business changes ownership, many interested parties can be nervous about how the company will change under this new leadership. Your new marketing plan can include assurances to them that they’ll receive the same great service as they’ve come to rely on and should include reaching out to them for feedback.

Those who care the most about what’s going on in your business are the people who want to hear from you when there’s a major change. This presents you with an opportunity to ask them what they want from you going forward and to really listen to their feedback.

They’ll also want to know what drove the change in ownership. By being transparent, you’ll put their minds at ease.

Overall, the focus of your marketing strategy should be on customer perception of the company, before and after the transition, and how to satisfy the customers in the long-term.

The following steps can help you market your company through a transition:

  1. Consider public perception of the company before the transition. Is the pre-transition company currently failing? Have there been recent PR nightmares? A complete rebrand may be in order. Financial troubles, poor customer service, or other reputation-ruining issues can be overcome if you manage the rebrand effectively. In short, your strategy at this point should be to start fresh with a clean slate, at least in the public’s perception. If the business’s reputation and finances are in good standing but you plan to make impactful changes to the company’s operations, it can be best to rebrand altogether. For example, if you decide that the company, post-transition, will undergo notable changes in products or services, a complete overhaul of the brand may be the best option in order for your branding to remain consistent with your offerings. This will help your customers move on with the company rather than feel uncertain about the future of the brand. On the other hand, if the company has a great reputation, no financial or legal troubles and is a leader in its industry, a less extreme marketing strategy is probably the best possible path.
  2. Have a plan. Managing the communications around the transition is a lot easier when you’ve got a communications plan with built-in contingencies. Without a solid plan, news could leak out uncontrollably and you’ll waste time scrambling to do damage control. Being able to fall back on your built-in contingency plan will help you sail these seas much more smoothly. Working with your key advisors, construct a plan that outlines your key message, methods of communication and the target of said communication. You’ll also want to assign tasks to your key transition team members, establish a timeline with stages and milestones, and set a budget for your communication efforts. Remember that your target audience can be more than one group of individuals; you have your employees, stockholders, vendors and suppliers, your customers and the general public, as well as local media outlets. It’s smart to have a version of your communication plan specifically for each sector of your audience as well as a tangible way to measure the success of each.
  3. Be specific. Avoid vague or ambiguous timelines and plans. Specificity in communication instills a sense of safety in stakeholders. Clearly and concisely explain why the change is being made, how it will affect business operations and what employees/stockholders/customers/suppliers can expect going forward. One thing to keep in mind when deciding what to share is that in the absence of information, the human brain will fill in its own details, whether or not they’re accurate. This can cause distrust and unrest among the masses.
  4. Solicit and heed customer feedback. Your customers’ main concern is going to be whether or not your company will continue to meet their needs, though some will be more adaptive to the change than others. Involving them throughout the transition will allow them to gradually get used to the changes, soften the effect of the completed transition and give you the opportunity to gain valuable insights from their input. You may not be able to resolve all of your customers’ concerns, but listening to and acknowledging them will encourage their acceptance of the changes to come. Plus, pulling them into the process can motivate them to share what they love about your company online, creating a chain of word-of-mouth recommendations in favor of your company.
  5. Diversify your communication methods. Not everyone is as connected as those in your company, technologically speaking. Failing to facilitate communications with those who are not as connected could cost their loyalty. Communicating offline can be facilitated via print advertising, tv advertising, mailers, press releases, events and more and will allow you to reach all of your customers, not just those who are engaged online. Make sure that you integrate a way for your customers/employees and other interested parties to communicate with you regarding the coming changes.
  6. Measure receptiveness. Putting out an announcement and hoping for the best doesn’t serve your business growth. Many companies think that they’re seeing the whole picture of their success by measuring their online engagement, but how are they measuring offline success? True, measuring offline success is more labor-intensive, but it’s important to get a full overview of your omnichannel marketing mix as well as a deeper, more granular view of how each component is performing. Sales is simply one component of the whole of your success that, taken alone, will not accurately demonstrate the success of your changes. So, how can a company get real, insightful, digestible data related to their online and offline marketing efforts across channels? To get these insights in time to make changes that your customers will be happy with, there are software programs that specifically track and analyze your retail and marketing data across platforms and quickly transform them into digestible insights. These insights will help you to make informed adjustments in your messaging throughout the transition and beyond.
  7. Highlight accomplishments. When you’ve shared with your customers and employees what they can expect in the near future as far as organizational changes, make sure you follow up with updates on small successes and milestones. Sharing successes allow customers, employees and other stakeholders to see the positive progress the company is making under new ownership. This in turn will help you achieve the buy-in of these stakeholders and make the transition more palatable for everyone involved.
  8. Develop and maintain strong customer relationships. In executing the preceding steps, make sure that you’re doing everything you can to make your customers feel like they are on this journey with you as more than a consumer of your products or services. Be transparent with them and hold yourself accountable for the things you promise you'll provide. Help them feel a sense of ownership and personal investment in your company. Fostering these relationships will not cause you to lose control of your company. You’re at the helm, and you are in control of your company’s customer relations. Managing these relations allows you to identify patterns or trends in the experiences they share so that you can stay on top of satisfying them long-term.
  9. Incorporate flexibility. The success of your company’s transition and the related changes depends partly on your willingness to be flexible throughout the process. While rolling out any changes in operations, brand identity or services, there has to be a certain amount of adherence to the change management plan for the transition to go smoothly, but as we mentioned before, you must have the forethought to build in contingencies and flexibility, because nothing ever goes 100% according to plan and the business landscape is constantly changing. Overall, handling a change in ownership, whether it’s through passing the company on to the next generation or selling the company to an outside buyer, getting customers, investors and other stakeholders involved in the process and keeping them informed throughout will allow them to get on board with the changes to come. Not only that, your efforts of transparency and customer relations can ultimately help your company grow at an even greater rate than before the transition.

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