Starting a business and developing it into a prosperous enterprise is a major accomplishment. And so, the desire to pass it on to the next generation and see it continue to grow comes naturally. It’s a legacy that has the potential to provide security for a family, but it takes more than handing over the keys to the door. Rather, careful long-term planning for succession provides the best chance for the transition to succeed and a business to endure.
Hemming Morse’s Jim Andersen offered his insights on how to successfully approach succession planning to North Bay Biz for its November issue.
He suggests that owners planning to transfer a business to the next generation first determine whether the potential successors are qualified and capable of carrying the business forward. He finds that in families with more than one child, the parents often are so concerned with fairness and treating the children equally that they fail to make wise decisions.
“If parents don’t figure out a way to manage their estate and decide who’s going to run the business, it’s a problem,” says Andersen. He explains that once the parents are gone, brothers and sisters don’t necessarily get along, and greed can preclude common sense and prevent a business from moving forward. “If you don’t have a great plan, it might be better to sell the business and let the children split the proceeds of the estate,” he says. If they do sell, it’s best to have experienced financial advisors with expertise in succession planning, who can recommend other team members, including a business attorney and wealth manager, to help the process run smoothly.
Should conflicts arise, families have several options to avoid disagreements. Parents might give other assets to children who aren’t interested in the business. If no one in the family is qualified, but the business is thriving, hiring a general manager or outside management is an alternative. It’s a solution that allows all the children to benefit, and they can participate on the board of directors, but aren’t directly involved in running the business. In larger businesses, having a paid board of directors is an important part of the transition process to make succession planning work.
Andersen believes the best time to start succession planning is the minute one comes into ownership. “Be thinking forward at all times,” he says, emphasizing the importance of effective communication among family members, as well as making sure operating agreements are updated annually. Then if they don’t agree, they have a way to deal with problems and avoid litigation. “Putting together a defensive plan is critical because the hazards and costs of litigation when you have family disputes can be monumental,” he says.
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