A common trait among successful business owners is to place importance on instilling their business values in their children. This is especially key when you plan for your children to play an increased role in the business as you age or after you die. In these cases, it’s important to guide your children in business starting at an early age and ensure they understand their future role. Your children are likely to have an easier transition when you eventually step down or scale back your responsibilities if they have grown up in the business.
It’s also integral to place great emphasis on the importance of responsibility and accountability in business, which will help your children succeed from both a practical and a financial point of view. However, succession planning isn’t all business.
The Psychology of Succession Planning
There are many emotional factors that a family must consider when it comes to planning for the future of your business. For example, from a psychological standpoint, mortality is a difficult topic to discuss with family and friends. However, your business will likely feel a financial impact when members of the family are hasty in decision-making or simply unwilling to discuss uncomfortable topics. So, lean into these uncomfortable conversations.
In some cases, business owners may fear losing control – so much so that they are hesitant to plan for new management. Many prefer to wait until they’re ready to retire to consider bringing children into a business transition, but that is often too little too late.
There is also common psychology around business owners tying their self-worth to their power and control over their company. This leads to some owners procrastinating on preparing a succession plan simply because it’s hard to accept that they will have to relinquish control.
When business owners fear family dynamics will be difficult to manage with regard to succession planning, it can be beneficial to have a third party facilitate meetings on the topic. Issues can be addressed before business estate planning is finalized, and the third party’s role can be to promote impartiality and fairness. It will be important to consider each family member’s role in the future business plan in these conversations, as well as to identify any threats to the future success of the business. This could include financial threats or those stemming from family dynamics.
Creating a Successful Business Succession Plan
In order to create a thoughtful, financially stable succession plan, it’s important to consider the above psychological barriers that prevent many owners from adequately protecting the future of their businesses. However, there are other factors to consider along with psychological ones.
The future success of your succession plan also hinges on strong knowledge of strategic estate tax planning. A business owner should always analyze the company’s financial situation and formulate a succession strategy that takes into account both people and tax processes. In the future, an adviser will need a detailed action plan that outlines the business owner’s preferences for transferring wealth and business interests across generations.
Here are five suggested steps to take:
- Schedule several strategic planning sessions with other senior leaders in the business. Discuss details about your goals for the business, your family dynamics and how you think your family will react to your plans.
- Don’t wait to introduce your children to the business – involve them when they are young and slowly grow their knowledge over time. Involve them in decisions whenever possible so they can learn to contribute in meaningful ways.
- Encourage your children to seek out professional experiences outside the family business. This will serve to broaden their perspectives and their business knowledge.
- Consider forming a junior board to provide opportunities for sharing ideas about improving business practices. This is a valuable way for your children to begin thoughtfully considering all it takes to run a successful business.
- Bring together a team of advisers who offer breadth and depth of experience, and who can ensure your succession plan works.
A family-owned business is so much more than just a source of income. It is often the most important legacy a family can pass from one generation to the next. An independent financial advisor should also play a role in the transition conversations to ensure the process incorporates the long-term planning needs of all parties while providing guidance for the most effective tax treatment possible. Planning effectively for these transitions helps to ensure long-term success for the business and the family.
