Practical Consideration in Family Business Succession Planning

Current statistics report that 70% of familyowned businesses do not survive to the second generation and that 90% of family-owned businesses do not carry on to the third generation.

There are many reasons for this paucity in survival of family-owned enterprises. The most obvious, yet possibly most often overlooked, reason is a matter of age. Generations ago, life expectancies were perhaps in the 50's or low 60's. Today, many businessmen are active well into their 70's or older. The next generation is therefore “in waiting” well into their 40's or 50's. By then, the more self-assured thoughts of “new challenges”, “risking it all”, “striking out in a new direction” “expansion of the family business” have lost their intensity. Alternatively, the potential successors have left the nest in frustration or to pursue their own careers.

Secondly, technology has played an extremely important role. Some whole industries have disappeared and entire industries or segments of them have been made obsolete by technological advancements in the last half century. Who would have thought that behemoths like Kodak or IBM or such equipment as typewriters, landline telephones or phonographs would have challenging or non-existent futures? The industry that the family business operates in may be past, or approaching, maturity.

However, one of the most vexing problems facing lawyers and accountants, whose commercial documents and tax planning come unraveled, are the dynamics of the transition itself. That is, in most family businesses, the final decisions on almost everything rest with the patriarch or matriarch. The offspring follow instructions: they may participate in decision-making but, as I have witnessed in a number of recent transactions, the post-closing management performance evidences a significant gap in the succession planning process. Rather, the only planning has been that provided by the lawyers and accountants for the transfer of the business, with that planning being restricted, for the most part, to tax planning.

What is needed for a successful transition is a “whole family participation pre-closing” in which the transition process is established, responsibility for operations and other functions delegated, training undertaken, the role and process for decision-making passed along and finally, the roles of the successors confirmed.

A case study may illustrate the problem: the father runs a successful family business for many years with his son and another equally important employee as heirs’ apparent. The parties plan a hugely successful, tax avoidance take-over and the new owners (son and long-time employee), who have worked together side by side for years, last 2 weeks before conflict occurs.

What happened?

The pyramidic decision-making process by the father is now a partnership of equals with different styles of decision making, personal goals, spousal participation, spending habits and inter-personal communication differences.

What could have been done to avoid the conflict?

More effort was needed in pre-closing planning, recognition of subtle style, needs and wants, and the assignment of responsibilities leading up to the take-over. Customer and supplier connections, the personal domain of the father, also need extreme care to ensure a smooth, graduated migration to the successors of the business.

Many successful multi-national corporations have mastered the process of succession planning, often taking years to plan. As soon as one CEO is appointed, the first step taken is to plan his or her replacement. In stark contrast, succession in family businesses happens once per generation. One must admit, of course, that if you do something just
once, it may not be your best performance.

Being a good follower, heir apparent and interested in the business is a long way from turning the transition into a success. In follow-up article, I will offer some suggestions as to how this preparation should proceed, how to evaluate prospective successors and, ultimately, how to achieve success on the first attempt.