Many small business owners today can be proud of the lasting value their hard work has created for themselves, their families, and their communities. Particularly during the last few years of economic downturn and recession, just keeping a small family-owned business financially afloat has become a major accomplishment.

Main Street #17:  Creative destruction
Creative Commons License Kevin Dooley via Compfight

While this recent economic uncertainty has delayed thoughts of retirement for a number of principals of small businesses, eventually even the most workaholic business owner realizes that the time has come to turn over operations to a new generation. Unfortunately, this time of transition often results in family and staff infighting, decreasing revenue streams, and missed opportunities for growth.

If you are the principal of a small business, the time to get savvy about succession planning isn’t when you reach age 65–it’s right now. Delaying the process can easily lead to a chaotic situation that has the potential to compromise the inheritance you had hoped to leave to your children and grandchildren.

Before creating your actual succession plan, it is a good idea to establish your goals after taking a comprehensive look at your company’s current operations. Does it make sense to relocate the firm, change focus, or do some rebranding? Have you decided on the role you will play after retirement? Are you committed to keeping the business in the family, or would you consider bringing in a qualified outsider or non-family-member senior staff member as your successor? And don’t forget to think about how the transition to new leadership will affect your staff, customers, and vendors. Be very clear at the outset about what you and all other stakeholders require from the succession process.

The first item in your succession plan should be to make an objective determination regarding your successor at the helm of the business. When multiple family members are involved, this can be an uncomfortable task, but it is preferable to name a clear successor early in the process to increase the chance of buy-in from all interested parties. This can also prevent drawn-out and costly legal battles. And experts advise you not to simply assume that all your children possess the same skills, or to believe that your chosen successor will be able to step in without training and guidance.

Treat the choice of your business’s next leader as you would any other professional decision that affects the long-term stability and profitability of your operations. If you are a new business owner, you should even give strong consideration to writing up a succession strategy as a component of your overall business plan from the beginning.

Some financial advisors recommend that you get an outside professional to subject your business and its potential leaders to thorough analysis and vetting, and that you then set up a comprehensive orientation and skill-development plan for incoming leadership. While the cost of such rigorous procedures may be beyond the reach of some small businesses, it could be a wise investment for those that can afford it.

At the very least, an objective process based on formal job applications, interviews, personality questionnaires, and skill evaluations can produce a result that everyone is comfortable with, and if there is no clear choice among existing family or employees, then business owners should consider the possibility of interviewing external candidates for the role. After such a procedure, some families even have come together to nominate a successor who may not originally have been on the business founder’s short list, but who earned their confidence and support after an honest assessment found him or her to be the best fit for the job.

If you name a family member to lead the company, don’t forget that you may have a number of senior employees whose continued participation and support are vital to keeping the business intact. If your current top-performers feel passed over, they may decide to leave, taking valuable knowledge, skill-sets, and customers with them. Consider offering members of your senior team minority ownership or other tangible acknowledgments of the value you place on their abilities and dedication to your business.

If your company is a larger one, implement your succession plan at every level. If one person moves up in the hierarchy, there will likely be shifts among the supporting players as well. Take the time to assign responsibilities now rather than later, to increase the likelihood of a smooth transition. This thorough look at personnel throughout the company will also boost your chances of holding on to key people in the positions that best fit their talents and your company’s needs.

On the strictly financial end, cover yourself and your heirs from unnecessary tax burdens by hiring a certified public accountant, or other neutral professional party, to evaluate the company’s assets and offer suggestions for tax strategies or better bookkeeping. Get a figure for what each owner’s portion of the business is worth. Use life insurance as the primary vehicle to transfer power among the company’s partners. If one of the partners should suddenly pass away, the life insurance payment will be used to buy out his or her share of the business, which can then be distributed among the surviving partners.

And always remember that if you do not identify family members or others who have the dedication and skills necessary to continue to grow your business, a sale may be the most appropriate option for everyone.

Peter Briger directs the operations of the San Francisco office of Fortress Investment Group, LLC, as the firm’s principal and co-chairman of the board of directors. He also serves as CEO and founder of Hydromine, Inc., a company that develops sustainable energy technology. Peter Briger previously spent 15 years with Goldman, Sachs & Co., where he served in a variety of senior executive positions.

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