Most family-owned businesses do not survive passage to the next generation.
In fact, it’s estimated that only 30 percent of closely held businesses make it through such a transition. That’s because a web of complicated issues from paying estate taxes and finding competent managers, to gaining consent of stock-holding family members makes survival a challenge, even if the firm is growing and profitable.
Some 95 percent of American businesses are now family-owned, including more than a third of the nation’s 500 largest companies. Of those family firms, 33 percent have an owner 61 or older, yet only 28 percent have a succession plan in place.
In those cases, failing to plan amounts to planning to fail.
Crafting a succession strategy can result in the survival and growth of the business, preservation of family harmony, minimization of estate and income taxes, and facilitation of retirement.
So, how can a business increase its chance of being among the 30 percent that survive?
While there are many essential elements to a sound succession plan, perhaps none is more important than the development and communication of a vision that includes personal and business goals. Opening the lines of communication to decision-makers throughout the family and business is a critical first step.
Commitment is key
Every business, whether a family partnership or not, needs to define and establish a shared vision of the future. It should be more than a dream or a set of hopes it must include management’s commitment to making it a reality.
Once the vision is established, goals must be set to help attain it. Much of this task falls to the owner, who must decide what to accomplish for the business, for family members, for key employees and stockholders. All goals should support the vision. Owners must also establish individual goals that relate to exit strategy, retirement and personal lifestyle.
There are several key questions that should be addressed early and often during the process. Should the owner keep the business or sell it? If it’s kept in the family, who will lead it? Will the selection of a leader create family acrimony? If the business were to be sold now, could the owner maximize its value? If the business will be sold later, how can the value of the business be enhanced in the short term?
A plan can be created by brainstorming with family members and/or other business decision-makers. This will provide a sense of everyone’s true interest in the company, and where they see themselves fitting into its future.
It will also allow any critical issues to come to the surface and be resolved. An inactive shareholder who wants regular payment of dividends, for example, may have different goals and expectations than those of active shareholders, who might prefer investing profits back into the firm.
Another key element in succession planning is identifying a successor. Research indicates that more than 70 percent of business owners over age 65 plan to continue working indefinitely. This statistic, perhaps more than any other, reflects why many business owners neglect to plan for a change of leadership within their firms.
Although dealing head-on with the succession issue is often a painful task, failure to confront it forthright can have disastrous consequences. Children or key management members may end up fighting among themselves for the leadership position, and the business can collapse or be lost in the battle.
Payoff in peace of mind
There are many critical issues business owners should consider when identifying and preparing a successor. They should review present and future leadership requirements and develop a process that takes into account the various objectives.
Perhaps a successor should be chosen with input from an outside advisory board. In the process, decisions can be made on the most appropriate roles for family members and key non-family participants in the future.
Succession planners should review the organization and ensure that the strategy mirrors the present and future staffing skills and the needs of the business. A “coach” or “transition manager” could be appointed to facilitate a comprehensive process.
The plan should then be communicated to everyone in the organization, and it should be made clear that they are responsible for helping the next generation succeed.
A good succession strategy can take years to develop and implement. Focusing on key areas such as overall goals and successor preparation can not only provide peace of mind but also the blueprint for a successful management and leadership transition.
Gary Boudreau is the Western region succession planning partner for Deloitte & Touche. He can be reached at email@example.com.
Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.