Preparing a successor to build on your legacy

In a perfect world, a family business would be passed down from one generation to the next or from family to an outside buyer with profitability and goodwill intact. That outcome depends on identifying the right successor and preparing for a smooth transition.

In reality, only 45% of businesses have a formal succession plan in place, even though 54% anticipate an ownership change by 2030¹. Poorly managed transitions can lead to family conflict, employee dissatisfaction and in some cases, a decline in business value.

Considering the stakes, business owners should put the same level of care into succession planning and business transition planning as they do into building their business. A thoughtful, individualized business succession plan is essential, informed by a clear understanding of the business, its people and potential successors. Owners who succeed in transition planning often take the following steps:

Start succession planning early

Most business owners are focused on daily operational tasks, especially in the company’s first few years. However, those who successfully transition their business begin planning well in advance, carefully considering the timing of the transition and whom they may select as a successor. Ideally, a successor will have significant experience with the company with an understanding of its operations, values and culture. Candidates who have an understanding of the history of the business can strengthen a future leader’s commitment to its workforce and success.

Establishing clear milestones when transitioning responsibilities and adhering to established timelines can move the process forward. For example, a successor should develop a strong understanding of key areas such as operations, customer base and billing, and the transition team should meet regularly to assess progress. Without defined expectations, succession planning can remain too abstract. Creating a detailed plan and maintaining records can help formalize the process.

Have an open mind

Business owners, like many people, often place significant value on trust, loyalty and long-standing relationships. While these qualities are important, it is imperative they be evaluated along with a candidate’s demonstrated capabilities and skills needed to lead the business successfully in the future.

Consider assigning specific roles based on individual strengths and proven abilities. In some organizations, leadership responsibilities are shared among multiple individuals, each contributing to areas where they have the most expertise. This approach can support both continuity and long-term growth.

Test a potential successor’s skill

You cannot fully evaluate a person’s leadership skills without giving them opportunities to lead and, just as importantly, to make mistakes. How they respond can reveal a great deal. Do they acknowledge when a mistake has been made? Do they take responsibility or cast blame elsewhere? Do they make quick and substantive corrections to avoid further issues?

Because employee relations are crucial, a potential successor should be given the chance to have direct supervision. For example, assigning responsibility within a specific department can help evaluate how they work with customers, suppliers and key employees. For a new leader to succeed, that person must prove they can earn the respect of key people within the organization. Respect does not come from a title alone, and not everyone is able to earn it.

Communicate your business succession plan

A clear line of communication is central to any successful business, and before a transition it should include the owner, potential successor and other key stakeholders.

Early on, an owner can share their intention to pass leadership to a successor without naming that person. This can encourage potential successors to express interest in leading and may motivate them to perform and learn as they prepare for that opportunity.

An identified successor should be open and honest with the owner to help ensure alignment on leadership, business practices and other key aspects of the business. Regular feedback is essential to support their development. Clear communication supports more effective business succession plans and helps ensure alignment among key stakeholders.

Know your financial needs

When preparing for a business transition, owners should first understand their own personal financial goals and cash flow needs. This analysis can help determine the timing and structure of the transition, as well as whether the expected business sale proceeds are sufficient to support their lifestyle needs and retirement and legacy goals. This thoughtful financial plan can offer peace of mind to a business owner who is planning for the significant life event of transitioning their business.

This methodical approach to business transition planning, with thoughtful preparation, can help family businesses establish a strong succession plan and position the business for continued success.

Getting the advice you may need

While the planning process may seem complex, the most important step is getting started. Acting early can help ensure that not only are your intentions clearly defined and your business is positioned for a smoother transition, but that you are personally prepared for the next chapter with greater financial confidence.

Working with experienced advisors can provide valuable guidance as you evaluate your options, structure a transition strategy and prepare the next generation of leadership.