How to Pass on a Small Business to the Next Generation
We all can think of a small business we grew up going to that completely changed when new ownership took over. This is no surprise, as a small business is built out of the perseverance and fortitude of the founder, making it a direct legacy of the original owner. Those who follow can have strong emotional ties to the business and the platform it has been built upon; therefore, it can be hard for them to imagine the business without its founder. Eventually, a succession plan must be enacted so that the livelihood of the business can continue. Here are some tips that can help you smoothly transition your business to the next generation.
Communication Rooted in Respect
A business cannot succeed without straightforward, clear communication. Yet, the emotional ties bound up with the small business can make certain conversations feel impossible for both the predecessor and successor. One of the best ways to maintain relations during this transfer of power and assets is by bringing in a third party to establish your business plan. To have a solid succession plan, you need to consult a financial planner and legal counsel. A succession plan for your business includes clearly defined transfers of both power and assets. This is especially important if you have multiple children or partners taking over duties within the business. In order to keep the peace, be sure set clear duties and responsibilities for each person. Within these conversations, it is important to have an open mind to recognize the good differences between current and incoming management. Everyone operates and manages in different ways. There are good differences in this transition, so focus on the strengths that can help move your business into the future. For current and incoming owners, a healthy relationship is one built upon trust and open communication.
Prepare the Next Generation for Leadership
As you pass on your business to the next generation, you will have to resist the urge to exit too soon or to set such high expectations for the successor that you feel you can never walk away. As stated previously, as the founder, you are your business. In that same way, you must juggle the balance of releasing responsibility while still being the face and heart of the business. According to business consultants, it can take between five to ten years for a successful transition to take place. It can be detrimental if the founder walks away too soon without the next owner’s gears running or if the founder chooses to overstay after power has shifted. Like bringing in an open mind to communication, there needs to be realistic expectations on both sides. Unrealistic expectations can turn into arguments and bitterness can develop quickly. When you draft your succession plan, be sure to include a clear outline of your primary expectations of the transition process. Note that your successor won’t know everything and that’s okay. Being their predecessor will include a period of guiding them toward success. Successors will do well by acknowledging the magnitude of all that the business means to the founder and striving to respect the integrity of the business. If you find apprehension on either side, it may be best to consider a trial period to determine if the successor truly wishes to take on the responsibilities associated with the business.
Ultimately, the transition of a small business from one generation to the next will have its ups and downs. It is important to remember that the process can be highly emotional for all parties. The transition needs to be laced with a mutual respect for one another’s positions in the firm’s past, present, and future.
If you are a small business owner looking ahead to the future, be sure you take the time to set up an effective succession plan that allows for open communication, clear expectations, and a detailed transfer of both power and assets. Proper planning for the future can go a long way in preserving healthy relationships between successive generations as well as maintaining the small business you created.
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Michaela Dowdy
Financial Planning Associate
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