Exit Planning and Preparing the Next Generation of Leaders in Family Businesses

Author: Josh Huseman, Vice President, Business Owner Advisory Services

Family businesses have many unique qualities, and one of them is their ability to decide on the long-term future and leadership of the business.  Any owner of a family business knows how deeply connected the business can become within the lives of family members, whether they’re involved in the business or not. And if they desire to transition ownership to the next generation, it’s important to address one critical aspect of a successful exit strategy: ensuring the next generation of leadership is ready.

Research indicates that 60% to 70% of family business owners want to leave their life’s work in the hands of family members, but less than 15% do. Why? Handing over the family business to the next generation requires multiple things to align. The next generation needs to have the interest, capability and desire, and the length of time you plan for the family to own the business is important, too. Bottom line, successfully transitioning the business to the next generation requires preparation and desire from all parties involved.  

Transitioning your life’s work takes planning and patience. Here are some tips to help prepare you for what lies ahead.

Setting the Stage for the Next Generation

As business owners think about passing on their business operation to a new generation of family ownership, they’re primarily concerned about three things:

• Ensuring the company remains viable long-term
• Keeping current employees on a successful career path
• Caring for customer needs without disruption as the company changes hands
• Balancing the financial needs of exiting the business with the resources of the incoming generation

As business owners face these concerns, many find it hard to let go of day-to-day operations, even as a new generation stands at the ready to take over. However, business owners that remain involved for too long risk sending the business into a decline, so it’s important to be clear in your mind about when you plan to leave and be sure to give yourself enough time to address the critical areas below.  It is also important to communicate these plans to those who are affected by the transition.

Practice Ambidexterity

As you begin to prepare the next generation of business owners, it’s easy to be nostalgic about the past. Your success in business is due to a lot of factors, surely a result of hard work and dedication.  However, as you set the stage for your transition, it’s a time to practice ambidexterity.

In this context, ambidexterity might refer to respecting the core business while placing side bets on innovation and forward-thinking changes. Maybe you continue to offer a traditional product line but also break into a new related offering or improve an existing product to make it more competitive in the market. This is a great opportunity to engage the next generation by having them lead the effort to test out their decision-making abilities and leadership, while learning low-cost lessons along the way. Your goal is to help future-proof your business, while at the same time, setting the next generation up for success.

To learn more about practicing ambidexterity in your business, I suggest the book “Entrepreneurs in Every Generation” by Allan Cohen and Pramodita Sharma.

Set It in Stone

As you consider how you will practice ambidexterity, it’s also a suitable time to think about your company mission. While the purpose of your business is fully ingrained in everything you do, it’s time to make that knowledge more readily accessible to a new generation of owners. That means discussing your company’s mission with your business heirs and getting input on any new perspectives.

It’s also time to consider your values and what you’d like to pass on to the next generation. Taking time to formally communicate them provides your successors with a clear understanding and alignment of what future success looks like. 

Actively Prepare the Next Generation

If you’re like most business owners, you built your company a little bit at a time over many years. Some decisions made sense at that point in time, but not all decisions will last forever. This is an opportunity to decide what skills are needed to maintain success over another generation.

Start by establishing a competency matrix, which is a list of skills and abilities needed in the business by role, not by the person. 

You may have this firmly entrenched in your mind but taking time to formally record the business titles held by each member of your succession team, as well as the associated responsibilities, does more than create a record for the incoming owners. Doing so solidifies who is responsible for what actions and also helps you to identify gaps between your own duties and those currently held by members of your family or other key employees.

Next, define the rules of engagement. Decide who is able to take part in the future business, how new family members may join the business down the line and what expectations come with each role. For example, will you require a college degree for certain positions or limit ownership stakes available to the spouses of your children? Without this level of clarity, you risk being reactive to situations such as marriages, new college graduates or family disagreements, to name a few.

Last, share your experience. Take time to introduce the next generation to customers, vendors and business advisors. If appropriate, make them aware of estate plans or tax strategies.

Don’t Forget About You

While you’re busy preparing the next generation, it’s easy to overlook one of the most important people in the process — yourself. Start thinking about what you will do after retirement and begin making plans. Maybe you can take a test run with an extended vacation or begin phasing out the number of days you spend in the office.

Measures like these help you prepare for life after working while also allowing your business heirs to test their wings and gain added competency.

Business owners are often notorious for assuming that this part of their life will work out, often because of the success they had in building the business. But preparing yourself for exit is a step not to be overlooked and given the same attention as other priorities.

Just remember that no matter what ultimately happens to your business, family is always family, even if the business that sustains it changes over time.

About the Author

Josh is the Vice President of Business Owner Advisory Services. Josh is motivated by a strong desire to see business owners impact the world through their core values and entrepreneurial spirit. He is particularly intrigued by the unique opportunities and challenges that come with family-owned businesses, and he works hard to help them realize their full potential.