3 Stages to Transfer a Family Business

Many entrepreneurs put the issue of corporate succession on the back burner. As a result, they often risk losing their life’s work. The orderly handover requires time to search for a suitable successor.

Many entrepreneurs act as if they were immortal. They often postpone grooming their successors for so long that a structured change of staff is hardly possible. Commonly, many company owners find it extremely difficult to say goodbye to their companies; therefore, they avoid dealing with questions such as:

  • Do I even want to give up power?
  • Would I endure my successor being a better (or worse) entrepreneur than I?
  • What do I do with my time after leaving?

Mixed Signals Leads to Distrust

You neither have a clear perspective for your company nor how your life should be shaped after the sale. Your fickle decisions correspond with the difficulty of setting a deadline for the exit. Instead, you try to influence everyday events in “your” company, even after your official departure. This has dire consequences for the successor because the employees register this and think: “The old man doesn’t trust his successor.” Therefore, they don’t trust the “new” boss either.

This danger is particularly significant if the successor is the entrepreneur’s son or daughter. Emotional family ties heighten that peril and mandate clear agreements as necessary to govern the business’s handover to new management.

Set the Next Generation Up to Succeed

Many company transfers fail because the successor lacks the necessary qualifications. This is particularly true with family businesses because choosing a successor focuses on the entrepreneur’s life’s work staying in the family.

The beginning of every succession plan should include a detailed check:

  • Does my son or daughter have the necessary potential and personality traits to run the business in the medium or long term?
  • Is the business compatible with my son or daughter’s career ambitions?

Only then should a joint decision be made on whether offspring should follow in their parents’ footsteps. This decision should be tentative while preparation continues because the potential successor also develops during this time. This means that their wishes, needs, and goals in life often change.

Related: Exit Planning for Family Businesses. 

Start Planning Early

Preparing one’s successor should take at least two or three years, although it can take longer, depending on:

  • Whether a family member will be built up as a successor at an early stage and the planning is accordingly long-term;
  • Which requirements the potential successor already meets;
  • The complexity of the company’s business activities and how challenging its future management activities are; and,
  • Which optimization measures should be taken in operational, tax, and financial terms in connection with the company handover.

The earlier company owners think about who is best suited to continue the businesses they built, the freer they are in their choice:

  • Am I preparing one of my children or an employee for the long-term, or
  • Am I looking for a suitable successor from outside?

On the other hand, if the search for a successor takes place at short notice, they can only hope to find a suitable, “ready-made” successor from outside, a successor who has the necessary skills and experience. In haste, the process usually boils down to a company sale. This does not have to be the worst solution for the seller and the company because both competitors and interested family members can be safe havens for the operation, its further development, and the employees in the long term.

Targeted Preparation of the Candidate

The preparation to transfer operations to a potential successor occurs over four phases:

  1. Test phase
  2. Qualification phase
  3. Attachment phase
  4. Handover phase.

Lengthier handover planning allows more fluidity for change at the top of the company. This is particularly important for medium-sized companies because the trust of the company’s business partners and employees is usually strongly tied to the owner. The successor must first build this trust and acceptance, too.

Test Phase

During the test phase, the company owner and the possible successor work together for at least several weeks to verify whether they get along. Suppose it turns out that expectations (e.g., for example, concerning corporate management and development) cannot be bridged. In that case, it’s better to say goodbye to the joint “succession” project at an early stage with the least disruption to company operations. The important thing is that both sides be honest with each other.

The company owner and the potential successor should always have professional or entrepreneurial alternatives in mind if the transfer of management fails. Successors from the family, in particular, should keep checking: Do I want to take over the family business, or am I letting myself be pushed into this role? The latter often happens without those involved being aware of it.

Qualification Phase

If both sides agree the transfer could work, the qualification phase begins. The company owner and successor now examine together:

  • What skills and qualifications does the future entrepreneur already have?
  • Which ones do they still need?
  • How can they acquire them?

The younger the successor candidate, the more precisely that person’s training or further education can be tailored to meet the company’s requirements.

Skill Is Crucial!

The goal of qualification is the successor acquiring all the necessary skills to run the company successfully. Corresponding theoretical know-how alone is not enough–practical experience is essential. Whether a successor can best acquire these skills through an apprenticeship, various internships, and a degree depends, among other things, on the industry, the company’s business area, and its size.

In parallel to qualification, all financial and tax and any inheritance issues should be clarified. The failure to separate private and business assets in family businesses complicates these issues. Sometimes, the company even has to be reorganized to protect the interests of all parties involved; for example, the current owner’s concern regarding financial security after leaving.

Conflicts of interest often lead to disputes that put a permanent strain on family relationships if not recognized and resolved at an early stage. Therefore, it is advisable to consult external consultants (e.g., a tax advisor, lawyer, notary, and management consultant) to clarify these issues.

Gradually Delegate Responsibility

Ideally, the qualification phase lasts a maximum of two years. During this phase, the successor takes on all critical positions in the company, except that of managing director. In this way, they get to know the employees and business partners and become familiar with the operational processes of each department.

In the case of internal successors, an exit should still be possible in this phase if, for example, it turns out that, contrary to all expectations, the son or daughter is unsuitable to take over the company. Depending on the process and funding, the departing entrepreneur gradually hands over the decision-making authority to their successor, thus changing the company permanently during this period.

Transfer Phase

The transfer phase completes the delegation of responsibility and authority. The successor moves to the top of the corporate hierarchy. If possible, “senior” and “junior” should initially act as dual leaders. This works best when they share tasks. In this phase, the future boss is already at the top of the company but is usually not yet the company’s owner. This balancing act requires the successor have sufficient scope for action and decision-making. Getting the owner’s approval for every critical decision in day-to-day business undermines the successor’s authority and results in customers and employees not taking them seriously. That doesn’t motivate the successor either.

Schedule “Senior’s” Retirement

Plan the limited duration of dual leadership. Taking too long or repeated postponements signal to employees and business partners that the successor is not yet sufficiently competent (and may never be). This can create mistrust, weaken the position of the successor, and endanger the company’s long-term success.

An owner’s sale of a company is a one-time event involving nothing less than a life’s work and, usually, a considerable amount of money. When selling your life’s work, hire an experienced M&A consultant to quickly and safely guide the succession plan to success.

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Author Summary:
Dan Doran

Dan Doran

Is the Founder of Value Scout, Quantive and the 2019 Exit Planner of the Year. He is a recognized expert and speaks frequently about M&A, valuations, and developing more deliberate value creation strategies.

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