Business owners devote a great deal of time and energy to running and growing their companies. Many, however, fail to prepare an exit strategy, which means that an enterprise may end up in the control of someone who does not wish to manage it.
Accidents or illnesses may require a business owner to take time off from work. If a spouse is not actively involved with the business, he or she may suddenly face an overwhelming responsibility. Without specifying a qualified successor, a business could lose customers, sales or its good standing and reputation.
Working with a successor to manage the company
Continuing an organization’s operations when its owner cannot manage it could become a critical issue, especially when family members rely upon the income. According to the National Bureau of Economic Research’s Family Business Alliance, only 15% of companies studied had a succession strategy in place.
A succession strategy can begin several years before an owner’s retirement. A suitable successor could work with the business to learn the details of its operations in advance.
Hands-on training over an extended period helps a successor understand the dynamics of a company. A successor can benefit from an opportunity to work closely with the owner; it can also help ensure he or she can take the reins on short notice.
Appointing an untrained spouse or heir
Some entrepreneurs make the mistake of assuming that a spouse or an heir can manage an organization during an emergency. While it may work temporarily during a crisis, it may harm a business if the individual has no genuine interest in maintaining the company.
Only 30% of family-owned businesses survive when they pass through to a second generation. As reported by The CPA Journal, just 12% of companies survive through a third generation of successors. Successfully grooming an heir requires his or her commitment to the organization’s long-term viability.
Preventing a disinterested individual from taking over a business requires an effective succession strategy. The documentation used to execute and detail an estate plan may also outline how a business can effectively continue.