How to Choose the Right Successor
Much has been written about the fact that, in the coming years, many businesses will be transferred to the next generation but the focus is hardly ever set on how one should go about selecting one’s successor.
With the older and wealthier segment of the world’s population reaching retirement, it is more than likely that the management and control of the majority of family owned businesses will be transferred to the next generation.
There is no such thing as a simple blueprint on how to choose a suitable successor; the process involves family dynamics, something that differs from family to family. However, adhering to certain principles will certainly increase the chances for success.
To put the challenge of this process into perspective, one should consider the fact that various studies have concluded that only 30% family owned businesses make it to the next generation, and of those that do make to the second generation, only half of these businesses make it to the third generation.
As soon as a business has proven itself to be successful enough to have a future, it is advisable that the business owners start thinking about developing a plan for who will succeed those in control of the day-to-day operations in order to secure and preserve the future of the business. This transition process can be increasingly difficult in the case of small or mid-sized businesses, due to the fact that succession involves both management and ownership of the business. Furthermore, ownership is usually in the hands of one person, a partnership, or a family.
Instead of transferring the family business to the next generation, one could also elect to avoid the problems inherent with this transfer by selling the business. However, keeping a successful business in the family, more often than not, will yield more wealth and benefits for the future generations than any investments to be purchased with the proceeds from the sale of the business.
One should always start with an assessment of the critical management positions, for whom or for what positions in the business a succession plan is required, taking into consideration such issues as skills, experience, commitment, and key functions. Even if the family remains as the controlling owners of a business, the successor selected to manage the firm does not necessarily have to be a member of the family;it may be the case that the family members do not possess the right qualities. The ultimate goal is to develop a succession plan in order to keep operations running as smoothly as possible when that unavoidable transfer occurs or in case the unexpected should happen.
A good succession plan should aim to create a process; a series of steps, each with clear criteria for attaining readiness for succession is usually the best procedure. This plan also should include criteria for the successor that reflect the needs of the business in the future; it should identify the right person who can build upon what has been accomplished and take the business to new heights, not to preserve memories.
Furthermore, when creating a succession plan, one needs to keep in mind that it is also a process of “letting go” for the owner or senior management. The ultimate aim should be for the transition to be made as easily and smoothly as possible.
A well-balanced succession plan is usually comprised of four documents that should include the following components:
A strategic business plan in which an analysis is presented of the current business situation, considering such issues as the competition landscape and product or service life cycle, followed by an outline of investments and other activities required to secure the future of the business.
A family mission statement lays out the policies and procedures with regard to the role of the various family members in the business. This will ease the possible differences and disputes, as family members could have different opinions on what would be the best course of action to secure the future of the business. Herein also issues such as whether the ownership and management of the business is passed along to the heirs or whether the family members will retain ownership but not management are covered.
An owner's estate plan is an analysis of the home country tax laws of the various family members, with the aim to minimize their tax burdens related to the transfer of the business to the next generation. The aim of a good estate plan is to adhere to the tax laws of all nations while taking advantage of any tax regulations in those countries that can minimize the amount of tax family members must pay. A succession plan is a clear and complete outline of how succession will be carried out, what duties and authorities will be passed on to which successors and when, and how gaps in experience or knowledge will be filled where needed.
The best process when transferring a business to the next generation is to have a plan already established well before it is needed, a plan that both the older and younger generations have been involved in developing and one that feels natural and is expected by everyone involved. We at Sadekya understand very well that it is not easy for the founder of a business to let go and hand over the control and leadership of the business but a carefully thought out and well-developed succession plan simplifies that process and makes it more comfortable and successful for all concerned.
For more information about this or other structuring possibilities: Email us at: email@example.com Or visit our web-site at: www.sadekya.com