The impact of these transitions will depend largely on whether businesses have an effective succession plan in place. Statistics show that 50% of businesses will not. This is worrying as one of the most important elements in determining the longevity of a family business is a successful ownership transition. Inadequate succession planning may explain why only 30% of family businesses survive to the second generation, and only 14% make it to the third.

Given this trend, why are business owners failing to plan their succession? Perhaps a clue can be found in some of the attitudes expressed by family business owners when faced with retirement*:

• “Retire? I might as well be dead.”
• “Nobody can run my business as well as I can.”
• “My children will ruin everything I’ve built.”
• “How can I be fair to all my children if only one of them is in the business?”

Sadly, these fears can hinder planning. Without proper planning, a business owner may risk adverse financial or tax implications, or even endanger the future of the business. Conversely, a well-defined succession plan can ensure a successful transition.

For these reasons, it is important that, as a business owner, you put an effective succession plan in place. When building your plan, you should:

• start early
• create a support team
• identify and communicate your goals and objectives
• design, develop and monitor the succession plan.

Start early

The time horizon for implementing a successful plan is about five years. Add to this the time needed to explore succession alternatives and the horizon becomes even longer, making retirement feel distant. This can create complacency. However, illness, death or divorce may force you to change earlier than expected.

Therefore, it is important that your wishes and goals be made clear in case decisions need to be made in response to unforeseen circumstances.

It is also important to allow enough time for stakeholders and family members to adjust to and accept your plans. Without their support, you risk alienating family members or losing key employees. You should also set aside enough time to choose, train and develop your successor before you step down.

Create a support team

In its simplest form, a succession plan involves financial, legal, tax, and estate planning. Therefore, it is important you include professionals such as accountants and lawyers on your planning team. Involving family members and key employees will also help you to ensure their acceptance and prevent conflict.

Your accountant may be a sensible choice to run the planning team, since tax planning and financial analyses are integral parts of the final succession plan.

Identify and communicate goals and objectives

Choosing a successor can be stressful, especially if you have several children. Most parents wish to treat their children equally, so where the business is only one asset of the estate, you may decide to allot other assets to children who are not active in the business. If you cannot identify a successor, you must decide whether to sell or wind up the business.

You must also express your financial and personal goals for retirement. Your support team can help you articulate your goals and overcome the psychological barriers involved in publicly discussing personal matters. Once key employees and family members understand your intentions, they are more likely to support your plan.

Design, develop and monitor the succession plan

Once you have considered all your alternatives, it is time to put your succession plan in writing. At this stage, you will either identify a successor or begin to maximize business value for a sale.

A succession plan must also remain flexible – considering alternatives will allow you to respond with confidence if reality throws a wrench into the works. As well, regular meetings with your advisory team will ensure that your plan remains current and will support regular communication between key stakeholders.

In summary, a carefully prepared succession plan is the key to a successful business transition. To be effective, the plan must consider all details, from choosing a successor to tax and estate planning and any legal implications. While the prospect of planning your succession may appear daunting, starting early with the right support team will make all the difference.

* Ernest A. Doud Jr. listed 10 reasons why business founders or owners are not ready to transition ownership to the next generation in his article, Hats Off to You: Balancing and Creating Success in Family Business (Glendale, CA; Doud/Hausner & Associates, 2000).