Management Succession Planning for Family Businesses

Decades of statistics illustrate that most successful businesses ultimately fail.

In fact only 35% of successful family businesses (and virtually all small businesses are family owned) survive through the second generation, and of those only 20% survive through the third.

The reasons are typically straightforward and the excuses have been the same, from my personal experience, for over a quarter of a century.

How do I define failure when taking about these successful businesses? Why do I say these business fail?

What are the options available to a successful family business owner when the founder or senior generation of owners come to the end of their careers?

The business can be sold, or can it, as a going concern - but that rarely works out since the owners have to trust in the buyer’s ability to run the place successfully enough to pay their own salaries and still have enough left over to pay the note. Ask your accountant to illustrate this for you.

Or the company can be broken up and sold for the value of its assets - as in an auction. That’s unlikely to be satisfactory, certainly not to the employees who lose their jobs - and the depreciated value of the businesses assets are unlikely be to large enough to provide the stream of income required for the retiring generation let alone having anything left for their heirs. That’s pretty pitiful results for a lifetime of work, huh?

That leaves the only real possibility - the continuous operation of the company in the hands of the next generation through a process of succession that does not require a sale or other taxable event that diminishes the assets and the resulting income stream from the business.

Business owners who have put in twenty or more years building their companies know that succession is their only hope. They have all seen folks try the clever strategies to do otherwise and then ended up with very little to show for their life’s work.

Why do these otherwise successful business owners fail to take the steps necessary to insure that succession happens?

Business advisors know that a seamless succession process is the only way their client can exit the company satisfactorily but can’t seem to get their message across to them.

Everybody knows that business succession planning is the systematic process of ownership transition, and it is no simple task. Maybe that’s the problem, it’s too complicated for business owners to understand?

Iif you have been around a while, you know that business succession planning is not a one-shot event, but requires everyone’s commitment to review and revise. What, did you get bored thinking you could sign a paper and keep on with business as usual?

Needless to say, business succession planning can bring about peace of mind and it also protects unprepared family members from decisions connected with owning, selling and managing the family business - so what’s the problem, why don’t you do anything about it before the good options are taken away from you?

I have learned over the last thirty years helping successful family owned companies re-design themselves for the future beyond the current generation, that business owners already know 80-90% of what they need to know in order to have a successful transition to the next generation.

Advisors often fail to serve them either because they refuse to acknowledge the most productive role they can play, providing the tools and tactics available to help make the business owner’s dreams come true, or they assume the “not invented here” position and refuse to listen to the other members of their client’s advisory team.

Too often, estate and business succession planning is done with an eye toward the tax and financial aspects only, ignoring the very important impact of family dynamics - maybe because nobody asked the business owner specifically what he or she wanted to happen.

This invariably leads to plans that collapse since the unspoken desires of family members will serve to undermine not only the tax and financial objectives but also may destroy the family harmony.

Why don’t advisors address the emotional issues that are keys to moving forward with transition planning instead of simply concentrating on the legal issues, tax issues, insurance issues, and management issues.

What’s holding these business owners back? Isn’t it because nobody has asked them to describe what they want the business to look like? They have not asked them who is going to run the place and what plans they would like to see in force for their spouses and those offspring who are not involved in the business - where their entire net worth is tied up?

Does anyone ask the business owner their opinion, what’s possible given the abilities of the members of the next generation? Maybe if their advisors would ask and then listen to the dreams and goals of the business owners and their families they could create plans that everyone will buy into?

If the business owner knows 80% of what he or she needs to know in order to create a successful succession strategy - who are they gonna call to help them uncover them? Who’s going to ask them “what’s important” over and over again across a range of issues to help them surface for themselves their desired results?

As a business owner don’t you think that if someone could help you articulate your desires - that you could take them to your advisors so they can set it up?

If you are a lawyer, accountant, or life insurance professional doing business with business owners wouldn’t you welcome the insights of a professional business coach who has helped your client convert their deeply held feelings into words on paper you can use to create the documents?

Or are you afraid that the coach is going to encroach on your propriety turf? What’s more important to you - being in charge of the process and keeping all others at bay, or taking all the help you can get to insure that the resulting business succession plan achieves the desires of the business owner?

And finally, if you are a business owner you are the one with the power, the authority, and the responsibility to yourself, your employees, and your family for the ultimate success or failure of your succession plan and the financial future of your family. If your advisors won’t actively seek help of others, if they are determined to do “it” their way and you don’t fire them, the possible tragedies to follow are your responsibility.

You can blame whoever you want but that won’t change the fact that it is your responsibility.

Will the future be the time you’ll be happy with the decisions you make today, or not?

Who’s in charge of your business succession process?

Who is going to have to live with the outcome?

You know the answer, now it’s time for you to do something about it.

As Penn State professor William Rothwell ominously points out in the forward to Exit Right: A Guided Tour of Succession Planning for Families in Business Together, more than 40% of the people who run the closely held operations that comprise 80% of the North American economy will retire by 2010.

It makes me wonder, what is going to happen to all of those businesses? Although it is a noble gesture, passing a business down to the next generation is more often than not, unsuccessful.

In fact, statistics show that only one-third of all family businesses are successfully transferred to the next generation and only 13% are transferred onto the third generation.

Many family business consultants say the primary reason for this low survival rate is the failure to develop and effectively plan for the transfer of ownership and management of the closely held family business. I agree that this is a factor, but in my dealing with family businesses I find that there are some more fundamental reasons.

The first is that the next generation has a lot different life style than the business founder and entrepreneur. They do not share the same drive and commitment that dad needed to build the business from scratch.

They go to the good schools, get a taste of the good life and generally do not share the passion of the business founder. I recently was involved in selling a produce distributor. I found that most of the firms were in their second or third generation.

I asked a third generation owner why this particular industry had such success with keeping the business in the family. He said, “When you are up and on the docks at 3 am and work 12 hour days, you don’t have the time to spend the money.”

The next generation may have a grand scheme to turn the traditional printing business into a media empire or a liquor business into an entertainment enterprise. A few years back the second generation of a well known Chicago area computer leasing and IT Services Firm tried to turn it into an Internet Venture Firm with disastrous results.

Before you just assume that your torch will be carried by the next generation, make sure that the next generation even wants to run the business. Imagine the loss in value that would have occurred if the real estate billionaire from the western suburbs had turned his empire over to his son who simply wanted to produce plays.

Are your heirs even capable of running your business? Have you held on to the reins so tightly that the kids involved in the business have not been able to develop their decision-making or leadership skills?

Do they command company respect because of their personal strength and skills or are they grudgingly granted respect because they are the child of the owner? If that is the case, the odds are not good for them taking over when you retire.

Another big challenge is trying to balance fairness in employing many children or even grandchildren in a family business with various skill levels, compensation levels and ownership levels. The jealousy and in fighting can absolutely grind the company’s progress to a halt.

The business owner must make some difficult decisions when he or she decides it is time for them to retire. Why did I create this business? Was it to keep this business in the family for generations or was it to provide for my family for generations?

If the desire and the capability of the children are not evident and the company is large enough, it may be the right decision to first get outside board members actively involved as step one.

Step two would be to hire professional management to run the business. A second alternative is to sell the company while you are still running it and it can command its highest value.

If you have children that want to remain in the business for the immediate future, incorporate that into the sale agreement with employment contracts.

Another way to think of it is, while I am running the business, the best ROI is to keep the bulk of my net worth invested in this company. If I am no longer running the company what is the best risk reward profile for my net worth?

Would my heirs be better off if the business was sold and the value converted to financial assets?