What are the odds of a family business transition being successful?
Statistically, the chance of a family business successfully transitioning from the first generation to the second is about 30% and the odds get much worse as you move to the third generation – less than 10%! These are worrisome stats, so it’s worth exploring why family transitions often fail and what you can do to succeed.
While an internal transfer is typically less complicated than an external sale, it may be quite complicated from a personal relationship perspective. You should have a plan in place before approaching your children or family members.
Some of the most difficult challenges include:
- Deciding who will succeed the current owner as President or CEO
- Preserving and building the company’s value during a transition
- Providing a smooth transition for owners, successors, and key employees
Other Possible Pitfalls
Splitting Everything Equally
While it may seem that splitting everything equally among your children is the fairest way to divide your business, it may not be if only some of your children work in the business. We have seen situations where this strategy resulted in the children choosing sides and destroying their relationships with one another. There are other ways to leave wealth to children who do not work in the business to keep everything equal and potentially avoid a rift between members of the family.
Gifting Company Shares
It may also seem like gifting company shares to your family members is the right thing to do. However, having family members pay for shares in the company (which could be at a discounted rate) will help to ensure that they truly value them. There are also creative ways to minimize taxes and maximize wealth that should be considered before a gift or an internal sale is consummated.
What You Can Do to Ensure Success
Make the “Hand-Off” Smooth
Planning and executing the actual transition to the next generation is not easy. It is essential for the new and less experienced owners to fully understand all aspects of the business including:
- Day-to-day operations
- Company finances
- Strategic planning and long-term business cycles
- How to hire and manage employees
- How to negotiate relationships with partners and vendors
Make Sure Successors are Willing and Able
Often in a family business, especially one that is multi generational, it is just assumed that the next generation will want to take over the business. This isn’t always the case and may cause trouble down the road. You should make sure that your successors want to take over the business and are able, in terms of knowledge and skills, to manage the business. If you plan to keep the business in the family, make sure that you spend time developing the business and leadership skills of your successor(s) well in advance. After all, they will need to find innovative ways to maintain profitable growth in the face of competition and the ever-changing business environment. It’s a pretty tall order! This is why preparing your family members for a business transition and developing a solid succession plan is so important.
Measures to Take
Some of the ways to overcome barriers during a family business transition include:
- Ensure complete transparency during the process
- Develop strong family governance
- Put together a strategic written succession plan
Especially in small and family businesses, succession planning can involve a lot of emotional turmoil, and it is often helpful to turn to an outside, impartial group of advisors for help with navigating the process.
Make sure that you give yourself and your successors enough time for the transition process, and that you’re informed about all of the choices available so that you can make the best decisions for you, your family, and your business. Having a sound succession plan in place can take the emotion out of the planning and help ease the transition for both the business owner and his or her successors.