Succession planning for your business
A smart transition can set up your business for another generation of success.
You're the leader and lifeblood of your business. But when you're ready to retire, you don't want to be so integrally tied to the business that it will fail without you.
Before you take on life after business, choose a successor who can continue your success. A smart choice will help you beat the succession plan odds: Only about 30% of family and closely held businesses survive to the next generation, according to the Family Business Institute.1
Identify the qualities your successor needs
The qualities you want in a successor are the qualities you need in any leader: They inspire people and bring out their best, they bring insight, they're influential, and they understand that the health and financial success of the company is critical to the success of the employees.
Here are some key considerations:
Start with self-inventory. Reflect on the skills and experience that make you an effective owner in order to help you replicate them in your replacement.
Be realistic. Your successor won't be a superhuman expert in every area of entrepreneurship, and that's OK. Instead of fixating on every shortcoming, identify the "must-have" qualities. The less important responsibilities can be addressed as you train your successor.
Look for creativity. Innovation often is critical for continued success so make sure your successor has fresh insight. A good successor will keep the best parts of the business while also bringing in new ideas.
Double-check your children. Don't assume your son or daughter is the best option without honestly assessing his or her abilities. Family business owners should understand that the ability to lead a company is not something that passes through genes like blue eyes or brown hair.
Train your successor
Once you've identified the required qualities, the top candidate should become evident. Then ask yourself:
Does he or she pass the gut check? Trust your instincts. If you had to leave the office for a last-minute emergency, are you confident your successor could step in? If you have doubts, you may need to rethink your decision.
Does he or she understand the company? As you walk through different departments, clients, and customers, see if he or she understands the core elements of the business. This person may not be an accountant, for example, but he or she should educate him or herself on finances.
Will employees follow him or her? It's crucial that your choice of successor doesn't spark power struggles or resignation letters. Watch how he or she interacts with other employees, and take their feedback seriously. If this person earns and returns their respect, it is likely you're on the right track.
Solidify your succession choice (and your contingency plan)
To help ensure your successor remains with the company, consider an employment agreement that bars him or her from going to a competitor and ensures confidentiality.
Make it so if they leave, they'd have to give something up, such as stock or a bonus, and be sure your successor's objectives and financial success are directly tied to the company and its success.
At the same time, prepare for the possibility that your successor won't pan out. That might mean choosing a contingency successor or considering an external buyer.
Either way, this is one situation where you've got to have a plan B.
Wells Fargo Private Bank and Wells Fargo Wealth Management provide products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a tax or legal advisor. Please consult with your tax and legal advisors to determine how this information may impact your own situation. This information is provided for educational and illustrative purposes only.
1 "Succession Planning." Family Business Institute.