Are you planning to retire or move on from your family business in the next five to ten years? If so, and you know who’ll succeed you, start preparing that person to lead. To reveal knowledge gaps, minimize friction among relatives and employees, and give everyone greater confidence in the next leader — and the business’s future — you should begin the preparation process as early as possible.

Build experience

Your chosen successor should understand the family business from the ground up. Rotating through key functions provides firsthand knowledge of how decisions affect customers, employees, cash flow and profitability. It also helps this future leader earn employees’ respect instead of appearing to have been handed the top job because of family connections.

Customer-facing work is particularly valuable. The successor candidate should accompany salespeople in meetings to learn how to identify customer needs, prepare proposals, discuss pricing and maintain critical relationships. Time spent in customer service can help build empathy and demonstrate how reliability, accuracy and timely communication influence customer loyalty. Marketing experience can develop skills in project management, brand stewardship, market analysis and measuring the return on promotional spending.

Financial training is important, too. Your successor must know how to:

• Read financial statements,
• Prepare and monitor budgets,
• Manage cash flow,
• Comply with tax obligations,
• Evaluate capital expenditures, and
• Work effectively with internal and external financial specialists.

To make effective strategic decisions, the successor will further need to understand how compensation, employee benefits and other operating costs affect the business.

Finally, exposure to HR can prepare a future leader to recruit, retain and evaluate workers. It can also prepare your successor to handle sensitive employee matters.

Standards and progress

Assuming the successor candidate is a family member, you may feel uncomfortable conducting candid performance discussions. Reduce subjectivity during the mentoring process by establishing written qualifications, development goals and a timetable for increasing responsibility. It’s important to evaluate your successor using the same clear standards you’d apply to a nonfamily candidate.

Provide regular feedback and consider appointing an experienced nonfamily executive, outside professional or advisory board member to help assess progress. Gradually transfer decision-making authority, beginning with smaller projects and advancing to responsibility for a department, major customer relationship or strategic initiative. This approach gives your successor room to make real decisions and demonstrate judgment while you’re still available to advise.

Outside perspective

Experience beyond the family business can strengthen a successor’s independence and professional credibility. Specifically, working elsewhere helps future leaders learn different systems, management approaches and workplace expectations. And it allows them to succeed without family connections.

Don’t make a certain number of years of outside employment an inflexible requirement, though. The right approach depends on your successor’s experience and your timeline. What matters most is that the individual gains meaningful responsibility and brings useful ideas back to your organization.

Real decisions

As you train your successor, don’t leave employees wondering who’s in charge. Establish a detailed timeline for stepping down, including a departure date. We can help you create a succession plan that addresses key tax and estate planning issues while protecting family relationships and the business you’ve built.

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Polk & Associates

Large enough to serve a diverse clientele, yet small enough to maintain a hands-on approach, we are committed to maintaining the highest accounting and ethical standards with continuous education, extensive research resources, and excellent quality control.

Polk and Associates is a member of the Michigan Association of Certified Public Accountants, and the American Institute of Certified Public Accountants. The firm participates in the AICPA Peer Review Program, and has always received the highest level of award for its audit practice and quality control.