Whether you're thinking of selling your business or passing it on to a family member or employee, succession planning can determine whether the business continues to succeed or falls apart under the new leadership.
For example, when Sterling Jaquith and her husband Michael took over Heartland Post and Pole Fencing, the company was in good shape, but the succession was not well planned. There were no set processes, no documentation and no mentoring period. As a result, the Jaquiths had a rough and costly time while learning the ropes.
"It was a steep learning curve," Jaquith said. "We made a lot of mistakes in the first two or three months, which was unfortunate because that was when the fencing season started. We didn't make a lot of money."
Various family business studies estimate that only 30 percent survive the transition from first- to second-generation ownership, according to Inc.com. If you would like your business to outlive you, succession training is vital. Here's how you can properly plan for your business's future.
Choose your successor wisely
When choosing a buyer or successor, it's important that you find someone who is not only competent, but whom you trust to handle the responsibility and carry on the culture of the company.
"You want to feel that, for the most part, you have a shared value system," said David Scarola, chief experience officer of business coaching and advisory company The Alternative Board.
Too often, Scarola said, owners make hasty decisions and discover after they've left that the company's culture has changed and their employees are no longer happy.
If you are passing on the business to a family member or employee, be sure they want it. Scarola recommended having that conversation early on: A business owner may think a son, niece or other family member wants to carry on the business, but the reality might be that he or she is not interested in doing so. An early conversation can save you the trouble and heartbreak of preparing someone for a responsibility he or she doesn't want, Scarola said.
Train early, and document your processes
The next important step in any exit strategy is to make sure that your processes are in order and well documented. This is important for any business, because in an emergency, you'll want your employees to be able to carry on. But as Jaquith noted, it's especially important for someone taking over the business to have a clear path forward.
"When you build something from the ground up, you think your processes are intuitive because you were doing it for 20 years," Jaquith said.
But sometimes, even the basics, such as maintenance schedules, are not obvious, she added.
If you are training your successor from within, it's never too early to start, Scarola said. He recommended beginning with simple, delegated tasks, even before you start discussing the possibility of the person taking over. This can give you an idea of how well this person may do in this role. However, Scarola warned against telling employees about the succession too early.
"Give them more decision authority over time," Scarola told Business News Daily. "The key inflection point, where you're really starting to let go, is when you allow them to make decisions you would not have made, but you empower them to make those decisions."
There are several steps you can take to train your successor, including showing him or her where everything is filed, having your trainee shadow you in meetings, and letting him or her make decisions while you are there, according to a checklist from Newcastle University in the United Kingdom.
Get the paperwork in order
In addition to having all of the processes documented, it's important to have the legal aspects of your business in order, Scarola said.
"A lot of times, the only equity a business owner has is the business itself," he said. "Consult a lawyer who specializes in the transfer of ownership."
If you're transferring a family business to another family member, Scarola recommended gradually releasing ownership — for example, by increasing the person's share of the company.
In "Family Business Succession: The Final Test of Greatness" (Business Owner Resources, 2003), authors Craig E. Aronoff, Stephen L. McClure and John L. Ward suggested preparing several distinct succession documents:
- A business strategic plan outlining the future path of the business, with allowances for each generation to make changes as needed.
- A family mission statement, which is especially useful when several members own the company because it helps determine the roles, culture and direction of the business.
- An owner's estate plan, which should include estate tax planning.
- A succession plan defining the steps for the gradual release of authority.
Even though they recently acquired their new business, the Jaquiths are already developing an exit strategy. They have begun documenting procedures, are taking photos to provide visual guidelines for quality control and are developing training programs for their new employees, including scripts for customer service calls before and after each job. It's not just about making sure the business is on sound footing before and after they leave, Jaquith said, but about making sure the customers continue to feel comfortable with Heartland Post and Pole Fencing now and in the future.
Business owners may not want to think about the day they eventually leave the company they created, but without succession planning, even a family-owned business risks failure. It’s never too early to start, and some of the preparations, such as writing down processes and identifying your eventual successor (if you want the business to stay in the family) can help the company both now and when you're ready to retire or move on to a new adventure.