Family Businesses – Succession Planning

With all that is happening around us it is likely many Family Businesses will face a difficult time. Then only way they can survive is to make sure that the foundations on which the family businesses rests upon are strong enough to withstand whatever comes along. One of the foundations that needs to be tackled (rather than avoided) is succession planning.

There are those family businesses, who prefer getting their house in order and fix the challenges they face before engaging the next generation. This approach is mostly valid when the risks and conflicts the business faces are so destructive that bringing the next generation into it might end up making things even more difficult to handle. On the other hand, the major risk of this approach is that by keeping out the next generation, you are further postponing an integration of them that is already overdue.

Another approach is to integrate the next generation into the transition process from the beginning. In this approach the senior generation will still have the formal authority, but can create space for the next generation to participate in a meaningful way and have a voice even if they don’t have a vote or final say. Taking this approach requires everyone involved to learn “on the job” how to tackle the hard issues, to disagree productively and to make decisions together. The complexity of this approach is that both generations (old and new) requires significant effort, commitment and coordination. However, it can drive lasting and sustainable results.

However, there are frequent situations whereby the present (old) generation who is in control is simply not willing or able to tackle the difficult decisions that come with stepping back from the limelight and relinquishing control to their children or other family members. This creates a stalemate situation that will likely stifle the business. One way out is to essentially leave the current structure as it is and focus instead on designing how the next generation will work together. Not pushing for immediate change can open up space to work and help the next generation prepare for their turn, under the guidance of those currently in charge. Using this staggered approach is likely to allow the present (old) generation gain confidence and hence become more willing to take incremental steps towards that agreed-upon future once it was in place.

Poor succession planning is the no.1 reason as to why 70% of family-owned businesses fail or are sold before they are passed on to the second generation. In fact almost 90% of family businesses don’t make it to the third generation. Succession planning is a journey. Among those succession plans that do succeed, besides the proper preparation of the next generation there is also a key element that needs to be handled is – the acceptance of non-family employees of the next generation and the handling of any concerns they might have. Addressing this can be difficult because the ability to choose a family successor and provide employment opportunities for family members is often a primary aim of family business owners. Thus, a key challenge for family businesses is gaining buy-in from non-family employees for the next generation of family leadership. To make sure that this buy-in takes place well there are some key matters that need to be tackled:-

  • Time – as I said succession planning is a journey. So the best successions are those that are years in the making, giving employees needed time to prepare for this transition. It is far better when non-family employees are introduced to potential successors early in the process. Familiarity breeds trust and cooperation as employees need time to become comfortable with a successor.
  • Family successors need to raise the bar (not pull it down!): It is easy, almost natural for non-family employees to perceive that family members have less accountability or responsibility, as whatever they do they will remain in the business. To counter this perception and its adverse effects, aspiring successors should demonstrate competence and model accountability. They need to work harder than the old generation. They need to show more commitment and accountability than the old generation. Credentials such as education or experience or a strong track record away from the family business can help reduce the fears of non-family employee that the successor is simply the product of nepotism. Likewise, the old generation of family business do well in demanding more from aspiring successors. Longer hours and tougher assignments during the transition process can inspire confidence among non-family employees in the dedication of the successor. This can help reassure employees that a family successor is the right person for the job.

Passing the baton to the next generation is a goal for many family businesses. It will not happen on its own. It requires proper succession planning. Such succession planning can actually be a brilliant opportunity for family businesses to strengthen themselves with proper corporate governance structures and sound decision making mechanisms. Moreover, succession planning will identify when it is best to clearly communicate family succession intentions to non-family employees and in making sure that a rigorous process is set up to have the aspiring successors prove their fitness of being truly adequate, skilled and committed to being the next generation business leaders.

I will be dealing with various challenges and issues that face Family Businesses, including succession planning issues, in a webinar that will be held on the 19th July. There is rarely any training and webinars that are specifically held to deal with issues faced by family businesses and so I encourage you to attend. To register your attendance please click HERE. In this webinar, I will also be showing how a family business can avail itself of €15,000 to finance the costs of succession planning, as part of a scheme offered by Malta Enterprise in conjunction with the Family Business office.

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