Seven Facts About Family Business

Succession

1. A Poor Rate of SuccessTransferring a Family Owned Business (FOB) to a new generation is hard! Even though most owners hope to have their children own and run the business, the high rate of failure – more than 70% - leaves many families in turmoil.

But what does “failure” mean? After all, transferring the ownership and responsibilities of a business seems pretty straight forward with a legal transfer completed in just a few weeks.

The initial transfer of the FOB is not the problem. The problems come after the fact. Here, “failure” is determined when the receiving or successor generation “ involuntarily loses control of the family owned business.”

Note the highlighted text: the successor is free to sell the business or even give it away. As long as these are done voluntarily, the transfer has not failed.

But when the successor is forced to sell the business, or if the business is involuntarily lost through bankruptcy or insolvency, the succession has failed.

2. A High Rate of CrisisFamily members have different opinions about topics like investments, dividend payouts, family members working in the business, or the appointment of external board members. By far, however, the primary source of all crisis (up to 85%) faced by family businesses focus around the issue of succession.

Discussing the transfer of the family business reveals a number of unresolved conflicts (e.g. real or perceived parental favoritism), resentments (e.g. the belief that the child “has” to go into the family business when she has no interest in doing so) or frustration (e.g. the owner’s lack of confidence in the successor’s ability to lead).

Rather than confronting and discussing these (and other) issues, families are more likely to bury their feelings and beliefs, increasing the stress to the family and those working in the business.

3. Owners are Not PreparingAccording to a 2007 Survey, 40% of all business owners plan to retire in 10 years; a figure that is consistent with the number of baby-boomers currently owning a business.

Of those expecting to retire in 5 years, fewer than one-half (45%) had selected their successor.

Only 29% of those expecting to retire in 6 – 11 years had selected a successor.

Close to one-in-three (31%) of all owners had no plans to ever retire; essentially declaring that they would likely die in the offices.

By not preparing their successors, owners are creating a crisis for those who will run and work in the business. The lack of planning creates a leadership “void” that will be difficult to fill when the time comes to finally leave the business.

4. All in the Family

In many respects, the family business can become a part of the family! The business is frequently discussed. Its challenges and rewards are readily shared.

Because of its history and opportunities 79% of the senior generation of owners would like to keep the family business in the family.

And 70% of the successor generation has the same hope.

Michael D. Allen, Motivating the Business Owner to Act, SFA2 A.L.I.-A.B.A. 1, at 7 (2001).

5. Why Succession FailsWhile the reasons for Family Business Succession failures are limited, addressing these issues will take time and require a commitment for both (or all) generations.

First, 60% of all family business succession failures arise from relationship issues, particularly how the generations work together and the level of trust one generation has for the other. If the successor, for example, distrusts the owners they will quickly go their own way after receiving control of the business.

Second, 25% of all family business succession failures are due to the lack of training the receiving generation has received. Even though the successor has worked in the business, she or he may not be equipped to operate and grow it.

Surprisingly, very few family business succession failures are due to the lack of tax or estate planning.

6. Nepotism and Sibling Rivalry Can Influence Succession Planning

In a 2007 survey by PriceWaterhouseCoopers, almost 67% of family businesses give family members a role in the business without measuring their performance. While this is unsettling for the managers and key employees who have worked to grow the business, it can also impact the relationships held between siblings as they consciously or sub-consciously compete with one another for an increased role in the business.

This sibling rivalry is a frequent problem, with children competing for the favor and approval of their parents. Parents may be aware of this and try to keep one sibling from managing or reporting to another, yet the size and scope of the business can make this impossible.

Additionally, a conflict can arise between those siblings working inside the business and those working outside. Those inside the business – the active children – may want to keep the cash inside the company, investing in its growth and paying salaries for those who earn it. Those outside the business – the inactive children – desire cash flow and can feel as though those inside are being overly rewarded.

7. Founders and Successors Can Differ

Founders may differ from successors, making family business succession planning difficult; particularly for a larger business.

More often than not, the Founder started the business with a strong, entrepreneurial outlook. They were – are – comfortable taking risks and over time proved their ability to create wealth for themselves, their family and those who work inside of their business.

Frequently, successors are not as inclined to embrace the characteristics needed to continue to grow the business. A large percentage of family members in the “second generation” have a difficult time with risk, choosing to avoid it whenever possible. Rather than “growing” the business (and thereby growing wealth) they are more likely to focus on “preserving” the business (and the wealth) started by the Founders.

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