Building a Business Legacy
What does the next phase of your business have in store? Build your family business so your legacy lives on for your successors.
For many entrepreneurs, building a successful small business from the ground up is the epitome of the American Dream. And whether you started your company to support your family or as a personal project, you may want it to outlast you. You put a lot of work in and your employees and customers won’t want your doors to close. So, how do you manage your business legacy?
If you’re keen to start up your own small business to create a legacy for future generations, here’s what you need to know!
Plan for the Future from the Start
Entrepreneur posits that one fundamental key to building your own business legacy is to “start with the end in mind.” By focusing on your end goal for your business legacy, you’ll be able to set out a clear plan to get there. Do you want your family to inherit the business? Do you want them to work for the business? If so, will they get precedence over more qualified candidates? What does your business structure mean for succession – will your successor be getting shares in a corporation or taking over a sole proprietorship?
You don’t necessarily have to answer all of these questions right away as you start up your business, but you should have them in mind. Once your business is more established, you can start work on a formal succession plan.
Creating A Succession Plan
When you work with your vendors and clients, you use formal contracts. Your business succession plan should be no different – it will have a significant effect on how things play out once you pass the business on. You don’t want to walk away without a plan in place; that can leave a huge (and expensive) legal mess that your successors and employees will have to sort through. It means the business won’t necessarily be run according to your vision or that your successors may not get what you intended. It can cause a lot of strife in your family. It may even mean the business can’t continue.
In other words, a formal, legally binding succession plan is an absolute necessity. Meet with your attorney and business advisors to discuss and draft a clear business succession plan. Start the succession planning process early (i.e. before you’re facing a serious illness or other issue) so you can handle it with a clear head.
A thorough succession plan should address both what happens when the founder steps down. It should also address what happens when there are multiple owners and someone wants out.
Issues to consider include:
- Who will run the business after you (or how a successor will be chosen)
- How ownership of the business will be passed on to your successors
- What the tax implications are and how you want to deal with them
- The process for buying out an owner that no longer wants to be involved (which may tax the cash flow)
- Stipulations regarding ownership (i.e. does ownership have to pass on to family members or can non-family members inherit?)
Succession planning is more complicated the more extensive and complex your business is. But even small, simple businesses need a clear plan if you want the business to survive for multiple generations.
Take the time to meet with an attorney to flesh out a succession plan. They can help you set up the necessary legal and financial structures to make sure the process runs smoothly (and according to your wishes).
And remember that your succession plan isn’t set in stone. As your business grows and your circumstances change, you’ll need to update your plan to make sure all the relevant issues are covered.
Set Up Your Business to Run On Its Own
One of the most important parts of your succession plan is how your successor will be chosen. In some cases, your children may want to step in and run the company. Your succession plan should cover that – whether family will get precedence over other candidates, for example, or what happens if a kid wants to work for the company and there’s no open position.
But your kids or successors won’t necessarily share your passion for your work. They may have their own plans for their careers. You’ll need to plan for that, too. Make sure there are provisions for hiring a non-family member to run the company once you step down – you don’t want the business to fall apart just because your children don’t want to be directly involved. They’re still owners and will still benefit from the business continuing to operate.
As part of your plan for a non-family member coming in to run the business, you’ll want to address keeping your successors involved in the business. Depending on the size and nature of your business, that may mean sending out regular updates or having regular meetings. And remember – shareholders need to vote on important issues. They ultimately control the company. So if you’re organized as a corporation, make sure to talk to your attorney about how your successors will be involved going forward.
Inform Your Successors Early
Your successors need to know how the business is going to be passed along. You don’t want to leave them in the dark and force them to deal with everything as a surprise. For your business to survive when you step down, your successors need to be ready to handle it.
It’s a good idea to educate your children on some business basics. That means reading financial statements, understanding your business structure, and knowing how to exercise their rights as owners. Keep them involved from the beginning so they’re comfortable with your business and with their part in its future.
You should also talk to your successors about how they see themselves being involved in the business in the future. You may find that they don’t have any interest in working for the business, and that’s ok! They might have their own career goals, just like you did when you started the business. They may not have a knack for what you do or may want to accomplish something on their own without your help. If they take over just because they feel obligated, they’ll be unhappy – and they may not be the best choice to run the company.
Communicate clearly about your vision and make sure your family understands what’s going on – transparency is the best policy to protect your business legacy.
In addition to letting your successors know what’s going to happen when you pass the baton, you should make sure they’re familiar with your employees and management team. You don’t want the owners and the management to be strangers – they’re going to need to be comfortable working together. And if your successors plan to work for the company, your employees will want to be familiar with them. Your employees may be worried about nepotism – that your successors may end up in management without qualifications. Making sure your heirs, management, and employees are familiar with each other can help ease those issues.
Look Beyond Your Family Tree
It may seem counterintuitive to hear that one of the ways to make your legacy business a success is to hire outside of your family. Having a strong management team and professional employee support is crucial to continuing the success of your legacy business over the years. As we mentioned above, you’ve got to have provisions in your succession plan for hiring outside management. It may not even be an issue of your heirs not wanting to run the company – they may just be too young!
A professional management team will have the experience necessary to help your business through the transition away from your leadership and keep things running. They’ll also be able to look at your operation with fresh eyes and help nail down what makes your business a success and what may be better to change.
And outside management or no, you should seriously consider setting up an outside Board of Directors if you’re organized as a corporation. Look for a group of people with experience in your industry and related industries. They can help guide the company and protect the interests of the owners, no matter who’s running the business.
Finally, don’t forget to talk to your employees. They know that you won’t be running the company forever and they’re going to have questions. They’ll want to know if the business will keep operating after you retire or pass away. They’ll want to know that you have a plan for when that happens. They may have concerns about your children or heirs stepping in without the right qualifications. You don’t have to share all of the specifics, of course, but you should let them know what the succession plan generally looks like and make sure they know they can bring their concerns to you.
Let Your Business Live On
As an entrepreneur, you’re already forward-looking. You put a lot of work and passion into your business and you want it to last into the future. Ideally, you want it to go beyond your children or heirs and on to future generations – maybe in perpetuity! But that kind of business lifespan doesn’t just happen. It takes careful planning up front to make sure that your successors and the business are protected. You need a clear process for the transition and you need to make sure your employees and successors understand it. Then you can retire with the peace of mind that your business will live on to benefit your successors and future generations.
Learn More > How to Run a Business: A Step-by-Step Guide