Succession Planning 101: Pass Down or Sell?

Did you know 60% of 2^nd generation family business owners fail? For 3^rd generation owners, it goes up to an astonishing 90%! It goes without saying that deciding whether or not to pass the baton to the next generation requires thoughtful consideration. If you’re wondering how to determine if a family member is the right person for the role you need them to take over, read these success strategies for more insight.

Success Strategy #1 – Analyze Potential Successor for Fit

When considering a family member as a successor, determining the right role and fit for that family member in the business is crucial. The first thing you should do is try to picture them in the role that they would be taking on. Do they seem like a good fit? Do they have the right background, skills, leadership ability and personality for the position?

Success Strategy # 2 – Create a Success Profile

Once you’re clear on the role the successor is going to take, it’s useful to create a Success Profile – this includes documenting the skills, abilities and behaviors needed to be successful in a specific role. Once you have that, compare the individual to the success profile and you can identify what assets they have and what deficiencies there are, and then you can create a development plan. The plan will help strengthen weak areas so that by the time they take over their new role, they’re primed for success. Optimal lead time in doing this is 2-5 years before the new successor takes over.

Success Strategy #3 – Have Family Shadow You Before Naming Them a Successor

It’s natural for business owners to want to bring their children into the family business. What often happens is they aren’t as passionate and are given too much responsibility too quickly. This puts the business at risk and can alienate non-family employees. Before letting your son or daughter take over the business, he or she should spend as much time as possible “shadowing” you and participating in all aspects of the business, from budget meetings and strategy sessions to HR functions like hiring/firing and training. This will give you a “gut” feeling about their fit for the role.

Success Strategy #4 – Do an Internal Talent Inventory

If you determine that your child has neither the inclination nor the right skillset to run the business, it makes sense to consider a qualified, non-family employee who could take over the business. Think about leaders within the company who display the right skills and traits. Is there someone who has been your sounding board or right-hand person throughout the years? Is there a new shining star who shows great potential? If no internal options exist, should an external sale to a third party be considered? Read the next tip to learn more.

Success Strategy #5 – Have a “Plan B” Ready

If naming an internal successor isn’t possible, it’s better to sell to (or merge with) a third party, rather than risk the company becoming poorly run and/or unprofitable. It’s probably not your preferred choice, but selling to a third party when internal succession doesn’t work out isn’t a bad thing; you retain control over choosing your successor and you still get incredible value for the business you’ve built. You’ll want to consult a qualified professional financial advisor as soon as possible at this stage.

As you can see, a decision like this involving the future leadership and success of your company needs to be done objectively and with plenty of forethought. Now it’s time for you to get to work on gathering the information needed to decide whether or not to pass down your company to a successor or sell your business. For more succession planning resources, see below.