How to Develop an Effective Succession Plan for Your Family Business
Transitioning one business authority to another is hardly a straightforward process. Yet, most family businesses tend to skim over a thoroughly-crafted succession plan for the sake of trust.
Even and especially between family members, clear communication can eliminate the risks of coming to erroneous conclusions and making unproductive business decisions. If you’re handing over your business to a sibling or child, the key to a smooth turnover is an intelligent succession plan.
Tip 1 - Establish a Family Business Constitution
You can never go wrong with documenting a business constitution. The more comprehensively you identify processes for decision-making, conflict resolution, and formal procedures, the less room there is for potential misunderstandings.
Documenting agreements enables every member to clarify expectations, minimise emotional disputes, and, most importantly, maintain relationships. For smaller businesses, learning to navigate issues before they escalate takes a learning curve. As you scale up, you’ll be better equipped to handle disagreements and come to sound conclusions.
Tip 2 - Get the Entire Family Involved
Regardless of their contribution to the business, each family member should have the right to relay feedback and input regarding a workable plan. As a business owner, it’s natural to want to reinforce authority.
However, not every member of your business will wholeheartedly agree with your choices—particularly those who feel left out. Especially if your business isn’t equally considering potential inheritors, your estate planning and will should reflect this unmistakably.
Though it may seem intuitive, some family members forego involving a successor to reinforce control over the decision-making process. Always ensure that they are in the loop, passing on knowledge and intellectual property promptly and seamlessly.
Tip 3 - Create a Business Valuation Framework
A business valuation framework will ultimately dictate transaction prices. With the right business accountant, you can value the company through workable terms and well-defined terminology to leave little room for misinterpretation. Even uninvolved family members should perceive equity in the process.
Tip 4 - Review Business Structures
Even if your current business structure is amicable, that won’t always remain the case. Though discretionary trusts are typical within family-run businesses, they don’t bode well when siblings become involved. You don’t own anything within a family trust and have no assets to bequeath in the event of your death. Similarly, a sibling death or matrimonial split can further complicate the process.
Another common issue when it comes to family business structures is capital gains tax. If carefully planned, you can reap concession gains of up to $4 million without having to pay any tax. However, the process involves several loopholes that you’ll want to foolproof with an advisor.
Family-run businesses are usually among the most successful ones. However, without a clear succession plan, you risk losing everything you’ve worked tirelessly for. By enforcing sensible policies and communicating them carefully to all those involved, the transition period need not be a stressful one.
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