How to ensure your diverse-owned business will thrive and build generational wealth.
You’ve worked hard to build your business and steer its growth. But while your leadership has been the key to your company’s current success, its longer-term future depends on how well you prepare for when you’re no longer at the helm. That preparation is your business succession plan.
In many family businesses, knowledge about succession planning processes and strategies might be passed on from one generation to the next. But for diverse-owned businesses, that know-how isn’t always easy to come by. Diverse small business owners, particularly those who are Black and Hispanic, are more likely to be first-generation entrepreneurs.
Failure to create a succession plan creates risks. New leaders might be uncertain about their future with the company or aren’t prepared for their roles. Lack of a plan also increases the likelihood your business won’t survive your departure. On the other hand, a well-thought-out succession plan increases the chances of a smooth transition and the long-term continuation of your business.
If you haven’t yet tackled succession planning because you’re new to the process, a few basic guidelines may help you get started. Here are some best practices for developing a strong succession plan to ensure that the business you founded will survive, succeed, and continue to build generational wealth.
What to consider in succession planning
Here are a few questions to think about as you begin making your succession plans:
How do you envision your business transferring to its next owner? Do you plan to pass it down to an heir? Will you hand it over to a family member, a business partner or a key employee when you retire? Or are you more likely to sell the business to an outsider when you’re ready to exit?
Who do you want to step into your role? If you have your eye on handpicking your successor, there are things you can do now to identify the right person. Most likely, you already have a few potential candidates in mind. Now’s the time to observe how they handle their current responsibilities and determine whether they seem capable of growing into a bigger leadership role. For instance, how do they relate to other employees and customers? How well do they manage finances? How familiar are they with the overall operation of the business?
Does your ideal successor want to run the business? Of course, it’s also essential to gauge the interest of those you have in mind as successors. Maybe your top pick loves the idea of becoming the next CEO. Maybe they’re a bit hesitant but simply need some encouragement to boost their confidence. Or maybe they have zero interest in taking over. If that’s the case you should probably move on to consider other succession strategies, like selling the business outright.
How will you help the next leader get ready? If you tap the next leader without taking steps to prepare them for the role, you’re setting them up for failure. Start the training now by giving them more involvement in decision-making and providing them with opportunities to acquire or improve the skills they’ll need to lead. Mentoring your successor-in-waiting and allowing them to shadow or rotate into various roles and responsibilities at the company — like accounting, payroll, marketing, supply chain management, and more — can ensure they gain the knowledge they’ll need to be successful.
Who will be in line to fill other essential senior-level roles when they become vacant — and how will you help them prepare? If there are other employees whose roles will change when you transfer the business, you may need to provide them with additional training or experience, too.
How will you ensure that the selection process is fair and that you choose the people best suited for their roles? The perception that your decision is based on anything other than talent and ability can cause conflict. Some may even accuse you of favoritism or nepotism. To prevent conflict, it’s beneficial to be transparent about the process and the qualities you’re looking for.
How do you want the ownership of the business to transfer? For instance, should it happen all at once or gradually? If you’re selling, either to a family member or to an outside party, will you keep a stake in the company? Do you have legal representation to draw up the paperwork? When deciding on which course to take, consider things like the family members’ personal financial resources and the estate or gift taxes that may apply.
How will you ensure that any Minority Business Enterprise certifications and contracts your business has remain intact when ownership is transferred? It will be important for the next leader to keep up with certification renewal requirements and maintain the business relations that result. If you’ve been handling this job yourself, share your knowledge so the benefits don’t leave when you do.
How to Include Your Family in Your Succession Plan
Your business succession plan will impact your family in major ways — both now and in the future — so it’s essential that they know and understand the plan. Communicating a well-developed plan to everyone involved gives your successors a chance to build the skills and confidence they’ll need to take over the business.
A good succession plan helps avoid family conflict by keeping everyone in the loop ahead of time about the successor you have in mind. This gives you an opportunity to explain your reasoning. If the person you’d like to tap to take over is on board with the idea, you may even want them to help shape the plan. Of course, the plan should also include a list of alternates in case your first choice isn’t interested now or decides to switch career paths later.
As important as it is to have a formal succession plan in place and to share it with your family members, don’t think of it as set in stone. You’ll need to revisit the plan from time to time to see whether changing circumstances require adjustments to it.
But knowing that your succession plan will be fluid is no reason to put off making one. The sooner you plan your business succession, the better the chances that the company you built will provide a legacy and economic prosperity for your family.
Here are a few additional resources to help you navigate the succession planning process:
SCORE, The Small Business Owner’s Guide to Succession Planning
Indeed, The Small Business Owner’s Guide to Succession Planning
U.S. Small Business Administration and Federal Deposit Insurance Corporation, Selling a Small Business and Succession Planning for a Small Business