Management and finances

Succession planning in a family business: Five questions you should ask yourself

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Planning your own company succession is no mean feat. At the end of the day, giving away your own life's work not only represents an emotional challenge, but also highlights important issues such as choice of successor, company value and funding. Tax and inheritance factors also play a key role , particularly if your SME is a family business and your successor is in the family. 

The good news is that those who ask the relevant questions early enough and begin planning can secure the long-term continuation of their own company even after they have stepped down. Below are the five most important questions for successful succession planning in a family business. This ensures that nothing stands in the way of a worry-free retirement and prosperity in the next generation.

What does succession planning mean?

Succession planning is a human resources development tool. It's a way of filling key positions in a company as quickly and as well as possible when employees leave the business.

Succession planning  often goes hand in hand with company succession. When entrepreneurs retire, succession planning ensures that the management is handed over to a suitable successor. The handover process is also defined and prepared in advance and the separation of private and business assets initiated. This helps guarantee the successful continuation of a business despite a change of management.

Five questions for successful succession planning in a family business

1. What's going to happen to your company when you retire?

The first step is for you as an entrepreneur to decide whether your family business should close down or continue to operate. You should take various factors into consideration when making this decision: If your business is not competitive over the long term, this might indicate that liquidation and therefore the full or partial closure of your company is required. However, if the future viability of your company is not a crucial factor, this indicates that it should continue. In this case, your succession planning aims to prepare the handover to your family successor as well as possible.

2. Who can and who would like to run your family company in the next generation?

A family successor is the most popular succession solution in Switzerland. Around 45 percent of SME owners hand over their companies to one or several heirs. To do so, the first step is for your descendants to have the desire and willingness to continue running the company.

As the owner, your job is to consider the suitability of your successor as objectively as possible. This can be a challenge with family successors due to the close personal relationship. It's advisable to seek the opinion of other people and to create a requirement profile to come up with the most objective evaluation possible. This way, you can be sure that the family member has all the necessary qualifications for the new management role, and you can find out what knowledge, if any, still needs to be built up or divided among several people until the company is handed over.  

3. How much is your company worth and how high should you set the selling price?

Estimating the company's value is also a key factor in a company succession. There are various calculation methods available to determine the market value of your company. Factors such as the company's dependency on the owner, turnover and profit achieved as well as the need for investment and modernization are taken into account in the process. To achieve the most realistic value possible as a negotiating base, it can help to seek the support of external advisors such as accountants.

With a family succession, the selling price of a company is often below the actual market value. In many cases, carrying on the family tradition is more important than achieving a high handover price, partly because the successor's financial resources are taken into account. At the same time, when considering the price structure, entrepreneurs should consider the fact that their company is often the mainstay of their retirement provision. The price should therefore not be set too low to guarantee sufficient reserves for old age.

4. What's the situation with your pension planning?

A business owner’s retirement is also a factor for company succession: How long would you like to work and what money would you like to have available in retirement?

The capitalization of your company can have a crucial impact on the amount of available retirement assets. In addition to the selling price, inheritance and tax issues also play a key role. To pass on your business to one of your children, for example, you have to have sufficient private assets to be able to meet the claims of other family members who are not a direct part of your company succession plans. This could be set out, for example, in a contract of inheritance. Good succession planning is therefore very comprehensive and takes  business and private factors into account.  

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5. How would you like to structure the process of handing over your business?

To ensure that the business can continue to operate successfully even after a change of management, you should allow enough time for preparation and discussion. This is because a change in management affects all employees, numerous areas of your business and the relationship with external partners.

Internal family succession offers the opportunity for a simplified transfer of knowledge, particularly if your successor is already working in the company. To ensure that the generation change in a family business goes smoothly, you should define in advance when the handover should take place and who is responsible for which tasks in the short and long term. Decide whether the responsibility is passed on in full or in stages to your successor and what role you as owner have in the transition phase. Ensure that the agreement for handing over the business is drawn up in good time and consider how to communicate the change of management internally to your employees and externally.

A structured handover process helps avoid uncertainties for suppliers, customers and employees and smooths the path in the long term for your successor. 

Succession planning in a family business: Sooner rather than later

For companies to be able to survive in the market over the long term, they invest a great deal of time and money in their strategic orientation. Successful succession planning should be part of that. Internal family succession solutions in particular often underestimate the challenges of handing over the business to the next generation. A clash of private and business interests can potentially create conflict both in the family and in the company. You can prevent many problems with sufficient advance lead time and planning.

You should therefore begin early with organizing your succession, discuss the matter openly with your family and exchange wishes and ideas. To find a suitable succession plan, entrepreneur families invest on average over six years. Sometimes more depending on the business and situation. 

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