Many of the world’s most successful businesses are run by multigenerational families. Walmart, BMW and Samsung are three prominent examples.
However while over 70% of businesses are family run, only 30% survive the transition from first to second generation and just 12% making it to the third generation.
What is it about family businesses that make them so susceptible to failure? The reasons are varied but there are some common themes that run through them that are all linked to the lack of succession planning.
So what makes a successful succession plan?
Start planning early: Five years in advance is good, but 10 years in advance is better. Many business advisers tell budding entrepreneurs to build an exit strategy right into their business plan. The longer you get to spend on succession planning, the smoother the transition process is likely to be.
Involve family members in discussions: Making your own succession plan and then announcing it is the surest way to sow family discord. Discussing the plan helps to identify who in the family wants to be involved directly and who is focused elsewhere. It also might help some family members find interest in the business they didn’t know they had.
Be realistic: You may want your first-born son to run the business, but does he have the business skills or even the interest to do it? Perhaps there’s another family member who is more capable. It may even be that there are no family members capable of or interested in continuing the business and that it would be best to sell it. Examine the strengths of all possible successors as objectively as possible. Families who continue to promote unqualified relatives into positions of power simply because they are members of the founding family are also on a fast-track to failure.
Do what’s best for the business: Making sure everyone has equal shares seems nice, but it may not be in the best interests of your business. It may be fairer for the successor(s) you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Another alternative is to use voting and nonvoting shares so that only some of the family shareholders can make decisions on company policy. It may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children.
Train & Educate your successor(s): How can you expect your successor to take over and run your business successfully if you haven’t spent any time training him or her? Your succession planning will have a much better chance of success if you work with your successor(s) for a year or two before you hand over the reins. For solo entrepreneurs, sharing decision making and teaching business skills to someone else can be difficult, but it’s definitely an effort that will pay big dividends for the business. Many children born into wealth are ill-prepared to manage money due to a lack of financial education from their predecessors. This results in poor decision making and puts the family’s capital at great risk. Families that also fail to nurture a sense of responsibility, history and family values in the generations to come, ultimately fail their business.
Get outside help: Business and financial advisers can help you put together a successful succession plan that will facilitate the process of working through issues.
A lack of corporate governance structure : Plenty of families are reluctant to address governance issues because it forces them to confront the possible need for major changes in how they manage their business. Governance structures formalise exactly who does what and how, but also provide a distinct line between family and business. Without family governance, it’s easy to fall victim to internal discord .