Education | January 08, 2024

How to Create a Succession Plan for Your Family Business

Small business owners often dedicate their lives to building their companies, from working overtime to investing their personal savings. Yet, there's one thing that many neglect — a succession plan. This is especially true for family businesses, with two-thirds of family business owners reporting that they don't have a documented legacy plan.

"Business owners can fall into the trap of assuming their family is ready and willing to take over the business, but you need clear communication to ensure that actually happens," says Stacey Hanson-Evers, SVP of Business Banking at Northwest Bank. 

The importance of planning 

It's easy to get caught up in the near-term operations of your family business and put off planning for what happens once you're ready to move on. But Hanson-Evers has witnessed the absence of a documented plan cause unexpected problems. For instance, she recalled one business owner who wanted his grown children to take over his business, but they all had different ideas of what that looked like. 

"His children wanted to run it remotely or from out of state, but the business owner had gone into the office every day," she said. "They weren't on the same page, and he had never relayed his vision of what the takeover would entail for his children." Conversely, Hanson-Evers worked with another business client who planned for his son to take over his business. The son had been working in the business for several years, rotating through the various departments to understand the company's intricacies. "By the time he becomes owner, he'll understand all the ins and outs of the company," she said. 

The difference between the two scenarios is communication and preparation. You want to address concerns and iron out any conflicts years before you plan to exit your company. The dialogue and planning help the next generation prepare to become an owner, which is very different from being an employee. It may also help them recognize sooner if they don't want to follow that path. 

Hanson-Evers recommended that business owners take the following steps to create a succession plan that works for their business and family: 

  1. Start the conversation early. "It's never too early to think about a legacy plan," Hanson-Evers says. Of course, you want to have an emergency succession plan in place for who will manage your company if you have an illness or accident. For retirement, however, she recommends beginning succession plan conversations at least five years before you aim to exit the company. That gives you enough time to prepare your successors, work out any potential problems, and change course if your family has other ideas for what's next for the family business. 
  1. Bring in your trusted advisors. Legacy planning can't be done in a vacuum. Your team of planners should include your attorney, financial planner or CPA and business banker. "Your trusted advisors should be able to guide you through the planning process and help you avoid any surprises," Hanson-Evers says. Introduce the next generation of your family business leaders to your professional team early in the process. That way, they can form their own relationships and have a resource for any concerns or questions. 
  1. Implement the required training. Starting legacy plan conversations early also allows you to identify your successor's areas of improvement or skills gaps. If your children already work in the business, for example, you can begin training them to become higher-level managers and executives. With a longer timeline, they can get hands-on experience in each aspect of the business or potentially draw on outside resources for specific training. In addition, with a longer onboarding period, the next generation can test and implement new ideas of their own. Meanwhile, the older generation has time to get comfortable with the transition of roles and responsibilities.  
  1. Ensure the takeover is financially possible. Expectation-setting and training are critical parts of the succession planning process. However, there's also a significant financial component. "There are multiple ways that business owners can configure the financial transfer of their business; whichever you choose, you want to make sure the plan makes financial sense for everyone involved," Hanson-Evers says. For example, successors may need to improve their credit in order to qualify for a buyout loan or assume existing lines of credit or mortgages. Connect with your banker to discuss what to consider regarding the financial aspects of your succession plan. 
  1. Check in often and adapt your plan accordingly. As Hanson-Evers noted, a business owner's original vision may differ from the eventual succession plan. To streamline your business transfer, revisit your succession plan at least annually. Connect with your successor to ensure your plan remains on track, and alter your plan to reflect any changes or new circumstances. 

"You can have zero hiccups in your business transfer," Hanson-Evers says. The key is taking the time to consider your vision, set your expectations, communicate your plan, and implement a program to make it a success.

Families that pay as much attention to their succession plan as they do their family business have the opportunity to sustain their companies across generations. Interested in learning more about family business succession planning? Connect with a Northwest Bank financial expert today.

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