Lessons Learned from Business Transition Planning
Lancaster County has a lot of multi-generational family businesses. You’ve probably seen countless articles like this one highlighting the “tsunami of change.” And if you’ve taken the time to read any of these articles, you’ve learned that the businesses that flourish in the second or third (or later) generations are successful largely because of the way they planned for the future. These succession plans have a number of things in common.
- Start ahead of time. The number one reason that businesses fail to succeed in the next generation is that they start planning too late. The founder of the company is the person with the knowledge, reputation, contacts and business sense that made the company successful in the first place. They did not get all of that overnight. It is impossible to expect that their children or employees will get to that level without a transition period. The business planning professionals that I work with recommend starting the transition three to five years out.
- Tackle smaller projects as on the job training. Some businesses, such as contractors or builders, have more success transitioning because their business allows for on the job training for the next owners. Sometimes there are separate entities for different projects. This may extend to having different lenders, developers, subcontractors, municipal official, etc., for each project. I have seen many examples where the individuals in the next generation “go to class” by running one of these separate projects. Very often, this includes having an ownership stake in the separate corporation or LLC. There is no better way to train someone to take over the whole company than to have them run a smaller company first.
- Work into ownership. This follows naturally from owning a smaller entity. If the next generation is successful in running a separate project, they should funnel their profits into buying the company as a whole. This way, the next generation is gradually gaining equity. This is a lot better than taking on a lot of debt to buy the company all at once. Gradually buying out ownership allows the next owners to inherit the founder’s financial position. Having a seamless transition with respect to debt and equity is just as important as a smooth transition in management.
- Plan your involvement. In many successful transitions, the company founders take a specific role in the business over the transition period. For example, in the construction industry, sometimes the company founders coordinate subcontractors or materialmen. Or they work with financing or marketing. This has a lot of advantages. First, it keeps the founders involved in the business, so that they remain a resource to the next generation. Second, by working on one area of the business, it allows the next generation to focus on certain parts of the business without being responsible for everything all at once. And third, since the founders are still involved, they are in a much better position to start the transition earlier and stay involved until the transition is complete. This can be achieved within most businesses if roles and tasks are properly analyzed.
Successful business transition plans have many of these same steps. After all, your business was not built overnight. So it only makes sense that passing it to the next generation cannot happen overnight, either. If you haven’t started already, set up a meeting with your professional advisors and develop a plan to ensure a successful transition for the business you have worked hard to build and maintain.