Family Owned Business Succession Planning

Family-owned businesses are the bedrock of the American economy, and for many people, the American dream consists of a family establishing and growing a company that they can hand down to their children and grandchildren. Unfortunately, transferring a business to the next generation isn’t as easy as it might seem. In fact, only about 40% of family-owned businesses are successfully passed on to the next generation, and only 13% go on to the third generation.

In Part 1 of this article, we’ll look at four of the most common problems faced by family businesses, and briefly describe how to avoid them. Part 2 will be a more comprehensive look at how to set yourself up for success by devising a business plan that can head off some of these issues before they begin.

 

1. Turning over Control

For the founding generation, passing control of the business to anyone else, even their own children, can be a very difficult challenge, for a number of reasons. Starting a business requires an investment, not only of time and money, but also of passion and commitment. The bond between founder and business can grow so strong over the course of years that the owners identify themselves with the company, and giving it up is literally giving up a part of themselves. They may also be afraid that the new owners won’t manage it as well as they did, and that everything they worked for will be destroyed. Statistics show that this is a very legitimate concern. 

Solution: Set up a phased timetable for an orderly transition, with stages during which power and authority is gradually handed over. During this time, the older generation will have a chance to pass on their knowledge and experience, and the younger generation should make sure that they listen carefully and show the respect that their elders deserve. This training process should help reassure the founders that the company can succeed after they’ve gone, because the valuable lessons learned from their experiences will stay in the business as shared knowledge. 

2. Handling Disputes

In most cases, founders will turn over the business to more than one person: two or more of their children or other close family members. Each of these individuals may have his or her own ideas of how the business should be operated or what its future should look like. Disputes are common even among siblings who have worked closely together for several years, because they may finally have a chance to do things “their own way” instead of following their parent’s orders. The founders may want to divide the business equally so as not to show favoritism, but this can lead to deadlock situations if there is no mechanism for breaking a tie vote.

Solution: Governing agreements for the company should clearly spell out what to do in case of a dispute. One solution would be to require the warring parties to submit to binding arbitration by a disinterested third party. Another technique might be to bring in the founders to act as mediators or tie-breakers, since everyone would agree that they have the firm’s best interest at heart. 

3. Seeing Things Differently

A common problem faced by family businesses is that the generations don’t see eye to eye on how to spend their time and money. The founders may have had to make sacrifices to get their business off the ground, scrimping and saving to make sure the company had what it needed to keep going. They likely worked long hours for very little compensation and made the business the focal point of their lives. In contrast, the younger generation may have a much more casual attitude toward the company, taking for granted that it will always be there. They can’t see the value in spending all their time in the business, and want to be compensated well for the work they do there. 

Solution: There’s no substitute for the drive and passion an entrepreneur brings into founding a business, and it would be unrealistic to expect the younger generation to make sacrifices at the same level as their parents. However, before turning over the reins, the founders should make sure that their children are willing and able to manage the company’s assets responsibly and also to put in enough hard work to keep the company successful. If not, it may be better to either hire an experienced management team to run the business, or sell the company and let the children use their share of the proceeds to start something of their own that they can be passionate about.

4. Ready, Fire, Aim

Most family business experts point out that the primary reason families fail to successfully pass their business down to future generations is lack of planning. Entrepreneurs would never enter into an agreement with another company without extensive research, legal advice, and signed contracts. However, when it comes to their family, these same policies may not be followed. They may assume that because all parties have good intentions, they don’t need to apply the same due diligence as they would in other situations. As a result, they may end up turning over the company to a management team that hasn’t been properly trained, that doesn’t have a clear vision and a long-range plan, and that has no provision for settling disagreements. A sure-fire recipe for trouble.

Solution: Any family that owns a business, no matter how small, needs to set up a succession plan as soon as possible, with advice from their attorney, their accountant, their banker and other professionals. It should spell out in detail how assets will be divided, how the company will be managed, how disputes will be settled, and what role (if any) the founders will continue to play. 

In the next section of this article is advice on how to set up a succession plan to help you plan for your company’s future. 

Read Planning for Succession and Success