Finding your replacement doesn’t just happen. Here’s what business owners need to know.
In a perfect world, a family business would be passed down between generations—or from family to outside buyer—in a swell of profitability and goodwill. That’s because the owner would have easily recognized the right successor, so handing over the reins would have been an easy decision.
Yet in the real world, just 41% of surveyed family-business owners have confidence in their succession plans†, and many business transitions fail. Fumbled transitions can lead to long-term family rifts, resentment among key employees, and, in the worst cases, damage to the business along with the wealth it creates. Only about 30% of family-owned businesses survive past the founder, and only 12% make it to a third generation‡
Considering the stakes, owners should put the same level of care into succession planning as they put into building the business, says Joe Wojcik, a senior wealth strategist at Huntington Private Bank®.
“You’ve got to have a plan and it’s got to be your plan, because as the owner you know your people, your business, and who is capable of being your successor,”§ he notes. Owners who do well, he says, often do the following:
Have an open mind. Owners, like most people, may be biased toward what’s familiar to them and choose successors based on affection¶. A better measure is demonstrated performance over time.
“You have to be willing to change your designated successor along the way if you have to,” Wojcik says.
Consider assigning specific roles to individuals, based on their proven abilities, he suggests. Wojcik works with one Ohio business owner whose company is now on its third generation.
“All three sons have roles. One is CEO, one is CFO, and the third is head of operations. They respect each other’s specific talents, and the business has gone to a level that grandfather and father would never have dreamed of.”
Delegate.You can’t test someone’s leadership skills without ever giving them opportunity to lead,” Wojcik says.
For example, you might have a potential successor take charge of purchasing or another department, to see how they work with customers and key employees. For a new leader to succeed, that person must prove she or he can build the respect of key people within the organization.
“Respect isn’t by title,” Wojcik points out. “Respect is earned.”
Plan methodically. Wojcik recommends setting specific milestones for owners to hand over responsibilities, such as a full understanding of billing, customer base, or production.
“Otherwise it’s too intangible,” he says. “Have a relatively detailed plan and then keep records and notes to help you formalize your process.”
Communicate. A clear line of communication is central to a successful transition, and it should include not only the owner and potential successor but other key stakeholders as well.
“The successor has to be open and honest with the owner to help ensure that they have a meeting of the minds on leadership, business practices, and a broad spectrum of things,” Wojcik says. “There needs to be constant professional feedback.”
Know your financial needs. Sometimes owners will sell the business and not provide for their own financial requirements.
“Discuss transition with professionals like your Private Bank advisor before you roll it out to your family,” Wojcik suggests.
Working with your Huntington Private Bank team—a team that has deep experience negotiating business succession plans—can help make sure you’ve covered all the bases.
Each business is different and requires a specific approach to transition, but most will benefit from thoughtful preparation. A methodical approach, with plenty of advance planning, can help family businesses establish a strong succession plan that continues to grow the business far into the future.