Maggie and Jamie have worked hard to build their restaurant supply store into one of the largest in the upper Midwest. They spent years of careful planning to not only provide for a comfortable retirement, but to have something that they could pass on to at least one of their three adult children.
While Maggie and Jamie have a clear vision for the future of their business, they may be disappointed to learn that their children might not share in those goals. Less than one-third of family businesses survive into the second generation, and only 13% make it to the third. Should Maggie and Jamie want to ensure that their hard work helps support subsequent generations of their family, thorough succession planning is a must. The survival rate of their business is greatly increased if they implement three phases:
Phase 1: Pre-Boarding
Succession planning is a process, not an event. Before putting pen to paper, help your clients have candid discussions of expectations from both the retiring parties and the business heirs. Position at the company is an option, not an obligation, to avoid putting pressure on a child who may not have the family business as part of their career path. Should no one in the immediate family express interest, having this insight early can help business owners look into selecting another family member or friend, creating a partnership, or if all else fails, finding the best possible way to sell or close their business.
For Maggie and Jamie, only their middle child, Teresa, has shown an interest in pursuing her parents’ business, while her brothers are pursuing careers in journalism and sports psychology, and do not feel that running a restaurant supply store back in their hometown is a compelling opportunity.
Having graduated with a marketing degree, Teresa feels that her education will prepare her to run a successful business. However, children considering carrying on their parents’ legacy should obtain outside experience to prepare for this type of role. In Teresa’s case, it’s recommended that she spend a few years working as a store manager in a similar business to learn the ropes of managing and get fresh ideas she can bring back to her parents’ company.
Phase 2: On-Boarding
Once it has been determined which children, if any, are ready to take the next step, coach your clients to hire them into an existing, defined role where they can learn the historical, cultural and strategic foundations of the business. By working this job, they will begin to truly understand how the business works and gain the respect of their peers. They will also have the opportunity to work with a mentor rather than a parent. Teresa, for example, could start as a marketing manager before being promoted to CEO following her parents’ retirement.
Phase 3: Post-Boarding
Once the parents are confident that Teresa is ready, as an advisor you can help the family work together to draft a succession and business plan, and update their estate plan to reflect this decision. Once everyone is satisfied with the plan, set an exit date and stick with it.
By helping Maggie and Jamie communicate openly and strategically, their family can set a realistic plan for the future of their business and have time to implement a plan that they jointly created. For more tips on how to help your clients plan for business succession, learn more through the Janus Henderson Labs Wealth Transfer program.
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