Planning for the future is key for family businesses

Family businesses comprise more than 80 percent of all businesses in North America and account for six out of every 10 jobs in the United States. Unfortunately, these vital contributors to our economy face an inevitable crisis: The vast majority of family businesses “fail” when their founders retire or die. In fact, fewer than one in three survives the transition from the first generation of ownership to the second. Only 13 percent remain in the family for 60 years.

Several causes underlie a failure to make the transition from one generation of owners to the next, including business challenges, estate tax issues and a lack of interest from the next generation. But the real reason behind the failure often is not the ultimate cause but the lack of a succession plan to deal with the cause. At any given time, 40 percent of all American firms are facing succession, but most do not have succession plans in place.

Succession planning involves many interested parties. For most family business owners, there is an obvious connection between their company’s continued well-being and that of their families. But succession planning also has effects beyond just themselves and their families. Their employees, customers, vendors and the larger community all have a stake in the business’s ongoing well-being.

Succession planning isn’t only for older owners preparing for retirement. The death or disability of a business owner can plunge a business into chaos. That is why it is vital for all owners of family businesses, no matter how old, to have a plan for succession and continuation of the business in case the unexpected happens and the owner is no longer available to run the company.

Many elements go into successful succession planning, starting by looking critically at the company’s business future, since a plan may be irrelevant if the business doesn’t have a viable future.

In cases where the business’s future viability is questionable, succession planning may not be the real issue. Rather an exit or change of business strategy may be appropriate. This could include selling the business to a larger company, merging with a competitor with more promising products or services or diversifying into new areas.

If continuation of the business is viable, the first step for owners is to consider whether it is desirable and realistic for management of the company to stay within the family. The primary challenge is to avoid making an emotional decision. Owners shouldn’t necessarily be thinking, “This is my company and I want to leave it to my kids.” Rather, they should consider: “Do my kids want to run the business?” “Are they qualified?” “Is someone else in the business better qualified?” “What is best for the family and the business?”

In the first instance, the interest, temperament and ability of the next generation must be candidly assessed.

In some cases, the owner may conclude that someone outside the family is better qualified to run the business – for example, a longtime employee who has risen through the ranks to a leadership position and knows the business inside and out. An owner must be prepared to accept this if it is in the best interest of the company. Admittedly, this can be terribly difficult to do because the ramifications of the decision will be felt not just in the company, but in the owner’s household as well.

While family relationships will of course factor into the equation, it is essential that merit drive the process, with the best candidate selected to run the company. Family name or birth order should not be the final determinant in deciding who should run a company.

Often, an owner believes that one of the children is the best person to run the company, only to discover that the child wants to do something else with his or her life. The worst thing an owner can do is pressure a child to take over a family business out of a sense of duty or responsibility to the family. If that child isn’t interested in the company, the succession is more likely to fail, and everyone — the family, employees and customers — will suffer the consequences.

Finally, it’s not enough to just have a succession plan in place. Many owners know who they want to succeed them but keep their decision to themselves. This can cause chaos within the company when the owner springs the succession plan upon the company on his or her way out the door. Instead, owners should fully communicate their succession plans well in advance of their anticipated exit to give the management team and employees plenty of time to prepare for the transition. This minimizes the risk of infighting when the owner finally leaves.

The vast majority of family businesses stumble and often fail during the transition from one generation of owners to another. However, if owners take a strategic approach to succession planning, and effectively communicate the plan, they can dramatically improve their chances of a successful transition.

Tom Manson, a partner with the Manchester law firm Cook, Little, Rosenblatt & Manson, and works extensively with family businesses. He can be reached at t.manson@clrm.com.