Opinions expressed by Entrepreneur contributors are their own.
Running a family business it can be an exciting and rewarding experience, but it can also come with its own set of challenges. Your family company may have survived the high threat of failure that hangs above average small businessbut you're not necessarily sure yet. only 30% of family companies pass from the founders to the next generation, and only 12% of them last into the third. If you want to be on the positive side of these numbers, you need to start planning ONGOING almost as soon as you start or buy the business.
The process requires tRANSPARENCY and honesty, starting with a question so basic you might think it goes without saying. But as many have learned too late, trouble starts when you leave something unsaid.
Do your kids love business too?
I've known business families who never talked about succession until it was time for the founders to retire—and only then did they learn that the children didn't want to take ownership. I had a friend who was a printer. Over 30 years, the husband and wife built a successful operation that included over 20 employees, two locations and real estate. When it was time to leave, my friend said that his son, who had worked in the business for almost 10 years, would take over. After further discussion, he realized that he had never asked his son if this was what he wanted. Come to find out, his son didn't want to be a business owner. He saw the stress and impact it was having on his parents and family and decided it wasn't for him. My friend had to find a new one exit plan at the last minute.
Sadly, for the founder who dreams of building a legacy for decades to come, this scenario is becoming increasingly common. Just as millennials and Gen Z often give up their parents' antique furniture and collections, many are refusing to inherit their companies. More than financial or management problemsI guess that explains the low band continuity rates for family businesses.
Related: Every business owner needs an exit plan – It's time to develop your own.
Just look at how differently generations have run their careers. While Baby Boomers tended to stay on a single path throughout their working lives, Gen X took a few detours. Millennials and Gen Z are getting completely off track (if they even had a defined journey to begin with), so it will be challenging to get one of them to make a lifetime commitment to run the family business.
If you plan to pass the business on to your child or another successor, you cannot assume that they will take it and do so willingly, not out of a sense of obligation. You can't assume your kids want to take over; you need to let them know it's an option for them.
Conversely, I recently spoke with a second-generation owner who has been working with his father for ten years with every intention of taking over, but he still doesn't know the plan because his father hasn't shared it with him. . In this situation, we trained second generation owner to talk to his father about the details of the exit phase. These details included the value of the business, the expected down payment the son would be required to pay his father, details of ongoing payments and benefits for his father after he exited and what the transition and handover plan was. Even if family members have the best intentions when transitioning, these details can cause worry and debate, so it's best to go into the process with a clear and detailed plan.
Once all parties are clear about keeping management in familyit's time to create the plan. Here are five tips I've personally found to help foster a smooth succession plan.
1. Be completely transparent
A successful transition is above all tRANSPARENCY. The new management must know the current financial condition of the company and what is foreseen for the future. There may be legal issues, off-the-books agreements with employees, or other issues they don't know about. All of those conversations—the good, the bad, and the very ugly—need to happen while you're going through this succession planning process. When people don't have these discussions, it changes the whole dynamic of a family.
2. Meet with an estate planner
The first step is to engage a business analyst, who will size the company and suggest strategies for passing it on to subsequent owners. An advisor specializing in family businesses can help you navigate the often emotional issues unique to family ownership. The advisor will take you through these difficult conversations and from there, they will bring in additional experts, such as tax and estate specialists.
The counselor's first step may be to take the intended successor aside for an honest conversation: Is this what you want to do? Can you find passion and purpose in this and have fun? If the answer is yes, then it's time to get down to business.
3. Set a deadline
Start with an agreed upon succession timeline. Ideally, it should cover four or five years before the handover occurs. Be clear and straightforward about everyone's roles, what they will be responsible for, and when their tasks will begin. When will the current leadership retire and how will their replacement transition?
The timeline should include financial dates such as valuation, payment schedules and equity release. Decide if the second generation will buy 100% of the company on day one or if the purchase will be spread over several years.
4. Have a backup plan
You should always have a Plan B, especially when it comes to family succession. If your son becomes CEO after you is Plan A and he tells you he'd rather pursue art, that's probably a sign that he won't thrive as a CEO. Who or what is Plan B? It can be another family member or even someone who is not in the family.
5. Consider selling instead
Even if your son or daughter is willing to take over, financial considerations may preclude this. What if you've built a wildly successful business worth millions? You won't just give the company to your descendants, but can they have the money they need to buy it? The wisest course may be to sell the business at full value.
Passing on the family business can fulfill your legacy dreams, but if the next generation isn't ready or interested, your legacy will only be tarnished.
The best transition tool: Talking about it
It is good for many people to sit down and discuss all these issues. The best family transitions I've seen are when the second gENERATION starts working in the business very early, so they get an idea of what the day-to-day is like instead of jumping into the company as their parents are getting ready to leave. One of the best examples I've seen is with a respected founder and CEO who had his sons and grandsons start working in his business very early on. One worked in the office of a franchise selling signs, the others were interned and all worked through the entry level sales department. Now, with each of them having almost a decade of experience in the organization, they have risen to leadership positions. Their experience of rising through the ranks has given them a full 360 view of how the entire company works and a respect for each person's role. This has made them significantly better leaders and successors than if they had entered later in their careers.
If you know early on that your successor would rather be doing something else, you have time to find the right person to continue what you've worked so hard to build.