Is my succession going to be smooth?
How much money do I need to retire, or just work less in my business?
If most of that money has to come out of the business, what are my options?
How do I want to transfer my ownership interests?
Who is going to lead the company in the future?
(notice how this question is somewhat different from the previous one)
Are they ready to lead? If not, what are the best options for me, for my business, and for
them?
How do I answer all of these questions in a way that is fair to all of my kids?
Can I trust my employees to remain loyal through the transition process?
What would happen to my business if something happened to me?
All of these questions can keep business owners at night, whether they lead a family
business, or are sole founders. Though every situation is different, there is a wealth of
experience on the best practices in the succession process.
Engines of growth
There are some family business owners who may feel inferior due to their “homegrown”
nature, but there is absolutely no reason to do so. Contrary to popular wisdom which holds
that it is a bad idea to invest in family businesses because family dynamics interfere with
proper management, academic studies indicate that family businesses generate a higher
return on investment than non-family businesses. In the U.S., family businesses are
responsible for 60% of employment and up to 80% of job creation.
Succession challenge
However, at the heart of the family business is a nagging anxiety – can the next generation
successfully own and manage the business? The basis for this anxiety can be found in
some well-known statistics – only one-third of family businesses survive into the next
generation, 12% into the third generation, and so on. These statistics don’t indicate failure in
every case – many successful family businesses are sold to outsiders. However, the
“succession anxiety” is well reflected by the cottage industry of family business consultants
that has sprung up to counsel families about succession problems. So we are left with the
following paradox: how can it be that family businesses, which form the backbone of the
U.S. economy, and are more successful financially than their peers have such a troubled
record when it comes to succession?
Succession planning for family businesses requires understanding and taking into account
their particular characteristics. Specifically, careful planning and clear communication are
essential. Establishing governance procedures and a written succession plan is very helpful
to ensure a smooth transition. This plan can address how business interests will be
transferred, valued, and financed, while also defining active and non-active roles for family
members. When family dynamics impact this process for better or for worse, adding
structure and thinking through potential challenges is critical, and will go a long way in
bringing future harmony and safeguarding the business future.
Encouraging Next Genners to gain outside experience before joining the family business is
usually highly beneficial. This approach builds confidence and broader expertise, ensuring a
better fit within the company. Succession should be viewed as a gradual process rather
than a single event, allowing both generations to adapt, understand each other and
communicate effectively over time. Open dialogue helps align expectations and address
concerns, fostering a cooperative environment.
Ultimately, family businesses must decide whether to continue as a family-run enterprise, or
sell to protect family wealth. While succession planning can be complex, mastering it is
crucial for sustaining the business. It can also be extremely rewarding to everyone involved.
Balancing family cohesion with sound business decisions ensures the legacy and success
of the enterprise for future generations