There’s an old saying – ‘shirt sleeves to shirt sleeves in three generations.’
It refers to the tendency for the first generation to build an empire, the second generation to maintain it, and the third generation to squander it.
You may not feel like an empire builder, or perhaps you aren’t the first-generation owner of your business.
However, chances are you want to see some legacy passed on to the next generation.
It’s about providing those we care about the start they need to build their future wealth.
Passing a business comes with many challenges, and it’s just a matter of your successors' competence or spending habits.
Changing markets, emerging technology, and the arrival of unexpected competitors can all eat away at your opportunity for long-term success.
Studies suggest that 70 per cent of businesses won’t survive to the second generation.
A further 90 per cent won’t make it until the third - and that’s assuming you have someone interested in taking it over!
If you are fortunate to have a successor-in-waiting, there are steps you can put in place to make the transition as smooth as possible.
These practices serve both for the successor and other family members who may have a vested interest in the outcome.
Explore all options
There is always more than one way to work through the process of who gets what and how the value of your business is determined.
Dealing with family members will bring more than its fair share of additional baggage - so that is something all parties should appropriately prepare for.
The emotional interaction beyond the straight analysis of numbers and assets will complicate the process.
Keeping everyone happy will be a complex process.
Consider finding an independent consultant to help remove some of the emotion from the process.
Establish a constitution
Outlining the rules and determining the powers that various family members will have during the process ensures everyone is on the same page.
In a similar vein, consider creating a shareholder agreement.
Regardless of who may take over the business, other family members may still retain a shareholding and that is a factor which must be considered. An outline of how they will interact is the cornerstone of a solid arrangement in the future.
Fine-tune the arrangement
Consider the uniqueness of your individual circumstances.
Many standard agreement templates exist; however, chances are your family will be unique and have needs that must be respected. Predetermining how disagreements will be resolved in advance is crucial to ensuring a smooth transition for all parties invested in the process.
There will be occasions when stakeholders disagree, and some form of resolution will be needed.
- How will these scenarios be resolved?
- Who will be responsible for this process?
- Will someone have a casting vote?
How will the business be valued?
A business valuation process can produce multiple answers depending on the method used.
The price will be what both buyer and seller are happy with.
Regardless, valuations will still provide a worthwhile guideline based on which the pricing process will be based.
Full disclosure of all methods used must be part of this process.
Transparency
Not only is honest communication important during the valuation process, it should go without saying that it's critical to all aspects of the transition.
Consider the needs of broader family members.
Are there others dependent on the business's income going forward who won’t be part of the succession process?
Will the older generations involved in setting up the current business still need to earn from it in the future?
Good luck
Succession may seem daunting; however, it's not one you can’t ignore.
Perhaps Anne Mulcahy, former CEO of Xerox, said it best.
“One of the things we often miss in succession planning is that it should be gradual and thoughtful, with lots of sharing of information and knowledge and perspective, so that it’s almost a non-event when it happens.”
Like it or not, you and your business will need to part company one day.
How you prepare for this process will greatly impact how smoothly it goes.
Pay attention to the detail required to make the outcome satisfactory for everyone.
READ EMAG