Succession planning is the process of both identifying the most important roles in your company and preparing for a transition within them. This process is especially important for small and family-owned businesses, which often struggle to survive leadership changes. Whether you’re planning to retire, face unexpected events, or simply want to ensure your business continues to thrive, early planning is essential to protect what you’ve built. Unfortunately, getting started with planning in the first place is often one of the hardest parts. Here’s why many owners struggle and how you can get the conversation rolling.
Why Business Owners Struggle With Succession Planning (And Why It’s a Problem)
It’s not uncommon for business owners, especially those who work with family members, to avoid conversations about succession planning. They may side-step the issue to avoid causing tension, especially if there are multiple potential successors, or simply because they would rather put it off until later (which can end up being too late). Additionally, no one wants to think about aging and being unable to accomplish the tasks we take for granted today.
The main problem with delaying succession planning is that it puts what you have built at risk without a plan for continuity. It can lead to disputes within the family or concern amongst shareholders. Oftentimes, businesses that fail to plan for succession have to undergo forced sales or lose significant value. You might also lose valuable employees, who leave because of the uncertainty, a change in atmosphere, or a feeling of underappreciation. Clients often follow, as promises can slip through the cracks, while contracts can get renegotiated or lost.
Despite these risks, only 34% of U.S. family-owned businesses have a documented, formal succession plan in place, according to a 2023 PwC Family Business Survey. Furthermore, just over 30% of U.S. family-owned businesses successfully transition to the second generation. This number drops down to 12% by the third generation, and just 3% by the fourth.
Kicking Off the Conversation: Who Should Be Involved and What Questions Should You Consider?
When it comes to proper succession planning, a single conversation is never enough. Ideally, you’ll want to hold a series of conversations about not just the current state of your business and your future goals for it but also who has the skills, leadership potential, and ability to take over key roles. Some people who might be involved can include:
- Existing company leadership
- Possible candidates within the company
- Family members, when applicable
- Managers, HR, or other employees with valuable perspectives
Although there’s no one correct structure for these conversations, some common questions both you and those you involve might seek to answer include:
- What are my business’s greatest strengths and current weaknesses?
- Where would you take the business in 5 or 10 years if given the chance?
- What are my company’s values, and how would this person be a good fit from that perspective?
- What is the ideal timeline for this transition?
- How will this impact my employees and my customers? How can I prepare for retention and help them adapt to the change?
- How much is my business currently worth?
- What are the tax implications of this transition?
Keep in mind that these initial conversations don’t need to involve legal details or contracts. That can come later once you have settled on a general plan for the future of your business.
Common Business Succession Mistakes to Watch Out For
If you have started your own business, you know that making mistakes is unavoidable. However, it can feel overwhelming to think of a mistake being made when it comes to business succession, because you will not be there to address it. On the other hand, failing to make a plan can be just as bad for a business as choosing the wrong person. Some other common business succession mistakes to keep an eye out for include:
- Failing to have a backup plan in mind. In the event that the person you have chosen changes their mind about taking over, you will need to have a second option ready. This can be a different person, an interim CEO or fractional leader, or a sales plan.
- Choosing based on family dynamics, not what is best for the business. Consider who is the best qualified for the job before you simply pick a family member or close friend to take over.
- Failing to consider how and if you will be involved at all after the transition. One of the most important parts of stepping down is stepping aside.
- Not preparing for the logistics of the transition. Whether it’s a secret recipe or legacy client guarantees, you need to preserve the institutional knowledge that makes your business unique. Ask yourself how the new owner will conduct not only big picture decisions, but also the day-to-day tasks that you may take for granted at this point.
- Assuming you need to handle everything on your own. Most small business owners are accustomed to taking on everything themselves. This does not need to be the case with business succession. While many people start by having conversations and thinking through ideas on their own, you can also choose to involve a business succession attorney from the start.
A business succession attorney does more than prepare legal documents. They help you clarify your goals, facilitate difficult conversations, and reduce risks that might otherwise threaten the future of your business. From drafting buy-sell agreements and coordinating ownership transfers to planning for taxes and protecting your legacy, their involvement helps keep the process on track from the very beginning.
Planning Can Start Small, But It Should Start Soon
Starting the conversation about succession planning can feel overwhelming, but even small steps make a huge difference. The key is to begin early and keep the dialogue open, revisiting the plan as your business and family evolve. Remember, you don’t have to figure everything out at once, nor do you have to handle it on your own. When you’re ready, a business succession attorney can help you build a transition strategy that protects your business and supports your goals.
