Why is family business succession planning important for family business?

Family business succession seems to be the hot topic at the moment – everyone seems to be thinking about it and, alas the stats are terrible – only around 30% of family businesses make it to the second generation.

I’ve recently been involved in research efforts with the New Zealand Government to find out why succession rates are so woeful for family businesses around the world. There are a couple of things that I think will help enormously and should explain why family business succession planning is so important for family business.

First off, I prefer to not call it ‘succession’.  The word itself is problematic. The worst part is that it seems to imply that succession is something you do on a certain date and then that is it. It also implies that on a certain date the current generation are to clear their desks, empty their lockers and never darken the door of the business ever again.

My favourite story is of going into a fourth-generation family business on the invitation of the son (Marketing Manager, age 34), who introduced me to his father (MD, age 68) who then introduced me to his father (Auditor, age 100!)  And I can recall three or four other family businesses who have dedicated offices set up for the parents who are in their 80s and 90s.  The family elders are not only a huge value to the business with their wisdom and experience, they love being involved and having a purpose that is beyond their well-earned retirement.

So let’s call it family business ‘transition’ and treat it as a process that takes time and allows everyone – the current generation and the next generation – to evolve and grow into their new role.

The second part of Family Business Succession/Transition is that there are at least two distinct, yet linked, parts to it that most people do not realise or understand the importance of when thinking about family business succession planning.

The two parts are transition of ownership and transition of business leadership.

Transition of Family Business Ownership 

Transitioning family business ownership is all around shares and what happens to them. It is a critical conversation and needs to be thought through and discussed thoroughly.

One needs to balance fairness across the family; gone are the days when the boys got the business and the girls got married…so there are important discussions around how they are split up. Passing on of shares may be part of estate planning – ie when the parents die and is part of their wills, or it may well happen before they die.  We tend to advise that at least some shares be passed on before parents die as it allows the next generation to be part of a shareholder team and learn what it means to be a shareholder while their parents can teach and support them – however estate planning is also a viable option.

The other consideration is how the shares are protected from marriage breakup but this is a topic for another blog.

Transition of Family Business Leadership  

The second major area of Transition is around business leadership.  As one family mentioned to us several years ago – if they died right now and their son and daughter took over the business, the key stakeholders in the business (their staff, bank, customers etc) would have no faith in the daughter and son’s leadership – they were convinced the business would not survive.

Having a good leadership transition in the business is critical. The next generation needs to grow into leadership positions and learn how to run a business effectively – they need to demonstrate, not just to their parents but to these key stakeholders that they are capable of running the business successfully.

We have worked with one business where the second-generation family member was told clearly that if they could not win over the staff, then they would not take over the business. That person went through 10 years of working in different parts of the business, building relationships and really learning what it takes to run a large and sophisticated business before being nominated CEO by the first generation family member. That business is now growing and prospering as well, if not better, than when the parents were running it.

So, when we think family business succession, think transition – and think both ownership and business leadership.  See it as a process that takes time and needs to be planned and discussed far earlier than we normally think. Successful, long-lasting family businesses talk about this, plan for it and have the frank and honest conversations that are required. Successors are selected on merit and have to demonstrate they can lead the business. Uniquely in family business, often you might get two siblings leading a business – the same rules apply.

For more information on how to put a great transition plan in place, contact us at Philip@familybusinesscentral.com