The Key to Succession Planning for Family-run Businesses

The long-term survival of private, owner-managed, or family-owned businesses, will depend upon a clear and early focus on strategic succession planning. Yet, in many businesses, a little of that goes into determining who’ll preserve the legacy they’ve built when the founders leave the grandstand.

There are very few family businesses that survive the passage of time and the winds of change. It is estimated that 70% of family-owned firms generally do not survive into the 2nd generation, and 90% do not make it to the 3rd generation.

So why is it that a large number of family businesses do not survive the third generation? The answer is complicated.

Research by PwC revealed that 43% of family businesses don’t have a succession plan in place, with only 12% making it the 3rd generation.

Developing a strong leadership pipeline with succession planning

Experts say that even though professional advisors are hired to chalk out a succession plan, they tend to concentrate on the technical aspect rather than the family components, which include family competencies, dynamics and internal issues.

Many of what are considered family business benefits such as loyalty, legacy, commitment, engagement, and values can quickly turn into liabilities or roadblocks to the business.

When family business owners were asked, “What issues are of the greatest importance and greatest difficulty for you?” They responded resolving family issues and formulating a succession plan.

Generally, family business owners or founders are unable to share their goals or vision for business growth. Business planning, succession planning, and financial planning are often viewed as ineffective use of time instead of a necessary business process. 

As the next generation takes over without clear set goals, they often find themselves without direction as they plan for the future. Therefore, learning how to manage the family component early on in the evolution of the family business will pay dividends down the road.

Research shows that almost half of entrepreneurs come from family-run businesses (PwC 2016). However, many next-generation members feel they don’t have space or the voice to contribute to the family firm.

It is crucial to find out if the next generation is interested in taking over. The decision should not be thrust upon them. Next, start them young if they are interested.

Prepare and familiarize

The best succession handoffs are often years in the making. This gives time for the person taking over time to adjust. And also, there is no ambiguity about the handover. Even the employees are prepared for the transition. When the time comes, the process is smooth and without any disruptions.

Accountability and competence

A well-run family business prepares the next generation in advance to take over. There should be grooming, training, and garnering of outside experience. Aspiring successors should demonstrate competence and model accountability. This reassures the employees that the person taking over is competent and not just inheriting the business due to the accident of birth or nepotism.

Involve skilled non-family employees to prepare the next generation. Make them a part of the grooming and signal to the non-family members that they are valued contributors to the firm’s success.

Approaching conflict

Strangely in spite of running big corporations, it is found that family business owners tend to ignore the succession issue till the last moment as they fear conflict. Human nature avoids confrontations; hence, an ostrich-like attitude comes into force–of avoidance. There are many important issues left unsaid for fear of ruining relationships.

But such an attitude can lead to catastrophe with the unresolved issues gaining bigger proportions, and ultimately the business suffers.

Mostly, the succession issue is very sensitive in first-generation family businesses. As there is no precedent here. 

Hence, the considerations should be:

Do you want the business to stay family run?

Do you want the management involved in the decision process?

If it is to stay in the family, what kind of skills the next generation requires and what structures should be put in place to ensure that it happens?

If non-family comes into the business, how to ensure that the ethos aligns with family values and welfare?

If there are multiple hires, then what will be the ownership structure?

Will it be passed on equally, will the responsibilities be divided?

Establishing clarity in the dispersal of accountability and responsibilities in a large family and business inheritance is a wise act. Succession planning not only protects wealth but keeps equal interests in mind.

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