How to Prepare Your Business for Succession

When their father died in 2008, Jessica and Charles Johnson Jr. were left with the question of whether to make payroll or close the doors of their family-owned business. The security firm had been started by their grandparents nearly five decades ago in the Bronx, New York.  “We could have disbanded the company and sold the assets,” says Charles Jr., who is a shareholder at Johnson Security Bureau Inc. “We would have been OK. However, we knew that many families were depending on us for employment, so we chose to keep it going.”

Their grandfather and Johnson Security founder, Wilbert, died abruptly without leaving a succession plan in place for his son Charles Sr. or widow, Dorothy, who ran the company until she retired in 2000. And, although Charles Sr. taught his children how to schedule employees and handle payroll, they too were left without a concrete plan on how to move the company forward after his health declined within three months of his cancer diagnosis.

“Our father left us clues, similar to a scavenger hunt map, on how to run the business. We had an abundance of paperwork that we had to dig through to find the answers we needed,” says Jessica. “We spent a lot of time on the Internet and calling various agencies to understand some of the nuances of the business operations. I would have preferred it if he had left more detailed instructions, an ‘owner’s manual’ if you will, or a GPS to run the business. That would have made things much easier.” Jessica, 38, left her pharmaceutical sales position to run the company full time along with her brother, Charles Jr., 37, in January of 2009. She now serves as president and majority owner.

Losing their father made the siblings realize how important it is to have a plan in place, even though neither of them has children. “You know what they say, the first generation builds it, the second generation grows it, and the third generation loses it. We’re trying to avoid being that generation that loses our family business,” says Jessica.

Indeed, reports show that only about 13% of family businesses survive the third generation. Most experts attribute this low survival rate to the failure of putting in place a strategic succession plan. Leadership transition is a pivotal point in the life of a company that can sometimes make or break it. As the founder, you may plan to exit the business at retirement, but what happens if the business needs to be transferred sooner because of illness, disability, or death? What if one of those circumstances occurs and business equity is insufficient to fund your retirement or provide for your needs? These are questions entrepreneurs need to ask if they want to keep their businesses alive.

The Johnsons, graduates of Goldman Sachs’ 10,000 Small Businesses program, are fortunate. Not only has the firm survived, it generated nearly $2 million in revenues for 2012. “Our goal is to hit $3 million in 2013 and to reach $5 million within three years. To meet those targets, we’re thinking about expanding into training and consulting.”

As with the Johnson family, entrepreneurs in the early stages of business generally focus their energies on building capital, growing their business, and just surviving, so it’s not uncommon for succession planning to be an afterthought. Even if the founder has done a great job of growing the company and making sure it thrives, measures need to be put in place to ensure that the company survives and business flourishes long after the founder is gone. Chris Gandy, vice president of sales for Water Tower Financial Partners, a MassMutual general agency in Chicago, offers the following five tips to ensure a smooth leadership succession.

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