A significant amount of the world’s wealth is generated by family owned businesses. Some estimates provide that the total economic impact of family businesses to the global GDP is over 70%, and family businesses employ just over half of workers in the United States. Despite these impressive statistics, family businesses often struggle to implement successful succession plans. In fact, it is suggested that nearly half of family business owners have no succession plan in place at all, and only around 30% of all family businesses make the transition to the second generation, 12% to the third generation, and just 3% to the fourth generation and beyond.
There are many factors to creating a successful succession plan, but one of the primary considerations is choosing the right successor. Below are five key considerations to choosing the right successor for your business:
1. Communicate your intentions
First and foremost, it is essential that you communicate your intentions to your family early and often. This means having frequent discussions with your family about your plans and aspirations for your business in the future. These discussions should occur even before your children may be old enough to work in the family business. Having frequent family meetings with all immediate family members in attendance is a good way to ensure your intentions are communicated consistently and openly to all family members. Taking this first step will help avoid potential disputes and hard feelings among family members, which is the ultimate goal to implementing a smooth, successful transition.
2. Gauge interest
By maintaining frequent discussions about your intentions, you are able to gauge which, if any, of your children are interested in working in the business and particularly in a leadership capacity. Often, this interest develops over time as children become more familiar with the day-to-day operations of the business and the requirements of a leadership positon. At this stage, it is important to also allow your children the opportunity to explore other career opportunities they may be drawn to naturally.
3. Determine strengths and weaknesses
Once you have communicated your intent and begun to gauge a family member’s interest in the business, it is essential to analyze each candidate’s strengths and weaknesses for the leadership position. In order to do so, it can be helpful to have each candidate work in different capacities of the business. Your successor will need to understand every facet of the business as much as you do, and the best way to learn each candidate’s skills and temperament is by watching him or her perform in varying roles throughout the business. Additionally, it is a good idea to have outside advisors or an advisory board provide input on candidates’ strengths and weaknesses. Outside advisors can provide invaluable, objective input that is free from bias.
4. Give each candidate the opportunity and time to prove themselves
Selecting the best candidate to be your successor should be a business decision. Evaluate all options, allow each candidate to prove themselves to you and to the other employees. Be sure to give each candidate time to learn, change, and grow. Great leaders are not made overnight. Given time, you will see which candidate has the drive, skills, influence, and temperament necessary to be your successor.
5. Communicate your decision
Lastly, it is essential that once you have selected a candidate, you communicate that decision to your chosen candidate. It is equally important to keep other family members apprised of your decision and address any concerns they may have regarding the succession plan.
While selecting a successor creates a foundation on which to build a successful family business transition, there are other key considerations for the transition including business governance documents as well as estate planning and trust administration. Selecting a collaborative legal team will assist you in navigating all the legal factors and the implications to your unique family situation.