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3 Things You MUST Get Right When Passing On

77% of family-owned businesses fail when the owner dies. Here’s how to successfully pass on your business before you pass on.

3 Things You MUST Get Right When Passing On

Many entrepreneurs we’ve worked with dream of handing over their business as a legacy to their children. In reality, most small business owners fail to achieve this.

There’s a plethora of generic prerequisites to have in place when transferring ownership in any business, like being a replaceable owner and having a stable business that’s not in a crisis. Simply, you need to build a business that’s desirable, one that anyone would want to take over, not just your children.

But family-owned businesses need additional, special care.

Most importantly, you need a succession plan that’s communicated carefully. I’ve seen that the best succession plans are those that empower the incoming leaders with significant input in the planning. They also allowed the plan to evolve.

The worst you can do is write your succession plan as if it’s a secret, then surprise everyone with it in your will after your death. The University of Connecticut reports that about 77% of family-owned businesses fail due to the founder or owner’s unexpected death. (Family Business Program, 2009)

In our work with family-owned companies, their successful hand-over to the incoming generation hinged on only a few but critical areas. So…

Here are the 3 things you must get right when passing on your family business to the next generation:

1. How will you pass on ownership?

2. How will you let go?

3. How will you groom the new leaders?

The most obvious method to pass on ownership is to gift it to your children by literally transferring your shares into their names. But this could have huge tax implications. A popular method we’ve seen is to transfer the owner’s shares into a trust set up for the children as beneficiaries. We’ve also seen clients retain ownership but transfer executive control by appointing their children as directors. (Ownership would then pass at their death.)

The second area garnered the most common complaints, being from our next-generation clients wanting their parents to get out their way. Understandably, it’s hard to let go of your precious business, especially if you feel the new owners aren’t ready.

Surprisingly, the opposite complaint was also popular: some owners exited too abruptly – mid-life crisis? The new owners longed for deeper mentoring and advice.

Both complaints can be pre-empted by solid planning and building up the third area.

In a 2012 survey by PWC SA, 25% of respondents were “unsure whether the next generation will have the skills and enthusiasm to do this successfully,” while 23% “intend to pass on their shares, while bringing in professional managers, citing the next generation’s lack of skills as the main reason for this decision.”

The most common concern I’ve noticed with my clients is that the incoming generation invariably needs skills and knowledge at a far higher level of competence than the outgoing owner-managers. This is most noticeable in the transition from the founder to the second-generation owner than transitions to generation 3 and beyond.

Starting a business is easy and relies more on technical skills and can be, counterintuitively, more forgiving of mistakes than in an established company. Taking over and running an established business, though, demands specialised management skills.

You need to plan with your new leaders where their enthusiasm lies, then co-design their specific roles. That’s the easy part! The real work lies in creating explicit learning opportunities before handing over full authority.

Throughout the hand-over process, from concept and planning to execution and completion, be cognisant of how the family dynamics affect every conversation.

It might not be rocket science, but transitioning the ownership in any family business can be a complex challenge. Get these 3 things right to pass on your legacy successfully.

(Image credit: Inc.)