Five Tips for Creating a Succession Plan for Your Family-Owned Business

Family businesses are responsible for 50% of the gross domestic product in the United States. Millions of Americans are employed by small family businesses. Additionally, 35% of Fortune 500 companies are public companies controlled by families or privately owned family businesses. If you own a family business, you may be wondering how you can plan for the unexpected. If you become incapacitated or passed away, what will happen to the company you worked so hard to create? Creating an estate plan can help you protect your business and your family.

Family Business Succession Planning is Crucial

After pouring your hard work and often your life savings into your business, it can be hard to think about what will happen when you are no longer here to run it. However, the work you do now to plan is crucial for your business’s survival when it comes to family business succession planning. Unfortunately, many family business owners put off estate planning, do not do it well, or wait until the last minute, causing a detrimental impact on their business. Many CEOs of family-owned businesses tend to remain the CEO for 20 to 25. Transitioning to another owner without a business succession plan can be a death blow to the family business.

Think About the Best Person for the Job

When you are in a family business, choosing a future leader can be particularly challenging. You have family relationships with all of the candidates. Sometimes business owners will simply choose the successor based on seniority. For example, they may appoint their oldest child simply because she is the oldest. Business owners may appoint the easiest choice to avoid family conflict, but doing so can cause additional problems. Taking time to broaden your search and appoint the right person can pay off in the end, even if it is not your oldest child.

Embrace a More Professional Skills Evaluation Process

The more objective, thoughtful, and inclusive your process of choosing the next successor, your employees will likely embrace the transition. When your employees believe that you put a lot of effort and thought into choosing a successor, they are more likely to be behind your choice. Sometimes business owners go by their gut instinct, but using a more professional process can help as well. You may want to engage in skill evaluation, reviews of career history, and performance assessments to choose your successor.

Rank Successors Based on Predetermined Criteria

If you are stuck and unable to choose your successor, you may want to rank the possible choices based on critical criteria that you select. Consider their education, past work experience, learning ability, advancement potential, and interpersonal skills. You should also consider whether they want to advance and are dedicated to your company’s values. Will they be a team player? Are they risk-averse? Are they willing to make risky decisions when necessary? You can score your potential successors and add up their scores to see who ranks the highest.

Train the Next Generation

You should also spend some time thinking about the next generation. Whether your children or grandchildren will rise into leadership positions in the company, take the time to involve them in leadership training. You may want to have your successor shadow you for a year or two to learn more about the day-to-day operation of the business.

Consider a Leader Outside the Family

Many family business owners assume that they will choose someone from within their own family. However, you may need to select a non-family leader to run your business after you can no longer do so. This type of leader might be called a “bridge CEO.” The bridge CEO can run the company while your leaders train another successor. Even though your family may own all the stock in the business, you should also develop a performance incentive that will reward and keep the non-family CEO. We also recommend having the new CEO sign an employment agreement.

Contact a Business Succession Lawyer Today

If you are a business owner and you would like to create a business succession plan, but you are unsure where to start, Arnold & Smith, PLLC is here to help. Our estate planning lawyers have helped many family businesses throughout the Charlotte area create succession plans that meet their goals and protect their assets. We can help you ensure your business survives in future generations. Contact us today to schedule your free initial consultation.