Over the next 10 years, 75% of business owners plan to exit their business, with 50% planning to do so in the next five, according to the 2023 National State of Owners Readiness Report by the Exit Planning Institute. Effective succession planning has never been more critical, and clear communication is at the heart of a successful succession.
The same report from the Exit Planning Institute found that 82% of second-generation business owners prefer an internal exit, with 46% leaning towards a family transition. These statistics underscore the importance of open and clear communication to ensure a successful family transition.
Drawing from our experience at Connecticut Wealth Management (CTWM), here are several key takeaways that we believe highlight how communication can shape the success of your business succession plan.
Explore Your Exit Options
The first step in any succession plan is to explore all available exit options. Many business owners assume the next generation will take over, but this expectation may differ from reality. A candid discussion with your potential successor can reveal their intentions and skillset.
“When there is an implicit pressure to take over the family business, many do so reluctantly, which can lead to issues later on,” said Denis Horrigan, Partner and co-founder of CTWM. “Clear communication about your intentions and leveraging outside advice can help you avoid future challenges.”
It is important to remember that family succession is not the only option. Alternatives like selling the business to a trusted management team member or structuring an employee stock ownership plan (ESOP) can offer valuable solutions. These discussions ensure that all stakeholders understand the potential paths forward and are prepared for what lies ahead.
In fact, research shows that 25% of failed family business transitions occur because the heir is unprepared. By fostering open dialogue early in the process, we believe that you can better assess the readiness of your potential successor and provide them with the necessary experience and skills.
Prioritize Communication with Leadership and Family
Once you have explored your exit options and made decisions about your succession plan, ongoing communication is crucial. Transitioning a family business can be fraught with challenges, particularly when communication is lacking.
Effective communication with both family members and existing leadership is essential to avoid misunderstandings and to maintain harmony within the company. Engaging in regular, open dialogue about succession plans can help address concerns and set clear expectations.
For instance, when one of CTWM’s clients decided to bring his brother-in-law into the company, unforeseen challenges arose due to a lack of clear communication with other key stakeholders in the business.
“A senior leader resigned, anticipating that the brother-in-law would take over,” Horrigan explained. “However, it turned out the brother-in-law wasn’t a good fit and left, leaving the business down two key employees.”
Such scenarios illustrate the importance of discussing your exit strategy with all stakeholders, including spouses, children, business partners, and key employees. Ensuring that everyone is informed and aligned can prevent significant disruptions during the transition process.
Establish Family and Business Governance Structures
Communication goes hand in hand with business governance, particularly in family businesses where emotions can influence decisions.
“Establishing a governance structure, such as an outside board of advisors, can help facilitate conflict resolution and provide an objective perspective, especially during an exit event,” said Horrigan. This board should include trusted professionals, such as financial advisors, accountants, attorneys, and industry colleagues, who can provide guidance and support during the transition.
By communicating openly with this advisory board, you can address conflicts early and work towards amicable solutions that benefit both the business and family. This approach not only resolves disputes but also strengthens the overall succession plan by fostering trust and collaboration.
Communicate Your Post-Transition Vision
As you plan for life after your business exit, it is essential to have a clear strategy in place for your next chapter. Transitioning out of a leadership role can be a significant emotional adjustment and requires thoughtful planning to help ease this transition.
“Ask yourself what you will do with your time. How will you find fulfillment and purpose post-exit?” advised Horrigan. “The emotional impact of no longer being in charge can be significant.”
By discussing these plans with family members and advisors, you can create a roadmap that provides both personal satisfaction and continuity for your business.
Wrapping Up
Throughout the succession planning process, communication is the thread that ties all elements together. Whether discussing exit options, engaging with family and leadership, resolving conflicts, or planning for life post-transition, clear and consistent communication ensures a smoother, more successful transition.
“That’s where the value of an advisor becomes extremely important,” concluded Horrigan. “Our objectivity ensures that decisions benefit our client and their best interests first and foremost.”
Ready to get started? With a strong focus on comprehensive planning, Connecticut Wealth Management (CTWM) can help you determine the best way to exit your business and provide the necessary context to optimize the outcomes of your personal and business finances. Contact us now to begin your journey toward a successful business transition.