Only about 10% of Family Businesses survive to see the third generation. When it comes to family business succession plans, the following ten mistakes in family business succession plans can be fatal to the continued life of the Family Business.
The plan does not benefit the health of the business and is not commercially viable.
When considering the perspective of the current generation of ownership, it is important to remember that they are working towards retirement and need to earn enough money to maintain their current lifestyle. As a result, the plans tend to reflect the individual needs of the retiring generation rather than the needs to sustain the life and health of the Family Business. What does this mean? It means that all business succession plans that are in place must be commercially viable.
The issue of power: control-oriented parents and owner managers.
Issues surrounding control or power, usually involve money and can play out in subtle ways. Most people in a position of power tend to only hear what they want to, or are coddled by the “yes-men” in their lives. These statements are true of both the parents and/or the owner managers of a Family Business. This issue can hinder the progress of your succession plan either upon implementation or after you have gone if the control issues among stakeholders are not resolved.
Communication is the key when developing a successful family business succession plan. Often times, communication within the family during this time can be strained as different parties seek to shape the future of the Family Business. Parents can be too control oriented and are prone to play the “money card” in an effort to bring their children in line with their ideas. Conversely, children can often be resistant to the advice of their parents and their older generations, momentarily forgetting the wisdom that comes with age. As part of the planning process, communication issues need to be resolved to ensure the success of the development process.
Sibling rivalry has the power to decimate even the strongest Family Business succession plans as it often does not come to light until after the parents have died. Problems between siblings can be problematic whether one, or more than one of the children are involved in the Family Business, so it is of the utmost importance that any issues between the children are resolved at the beginning of the succession planning process. It is also important to remember that decisions made with the business can impact how other family assets, such as homes and cottages are considered. Quelling these types of issues early-on will help ensure that the succession plan in place will remain intact and the Family Business will remain viable.
Choosing family over management ability.
The successor of your Family Business needs to be wholly qualified to both lead and manage the business in the years to come. That person’s success depends on the support of your management team, employees, suppliers, and customers. Though you may want or have even envisioned leaving your Family Business in the hands of a relative, the reality remains that this is not always the right decision. If you choose a less skilled and savvy relative to lead your Family Business over a seasoned manager with strong skills and vision, your business will suffer setbacks and could even fail completely.
Undervaluing family members.
A major oversight that could endanger the future health of your Family Business is the tendency to undervalue the business and management abilities of relatives. In some cases, people write succession plans that place more faith in the skills of professional management or third parties than their own family members. This can cause resentment but what is worse, is that this can cause the Family Business to falter or even fail because an outside party does not necessarily have the same sense of loyalty to the family, the business, or its goals.
Forgetting to prepare the family.
Making sure your family is prepared for how the Family Business succession plan is structured and their future role in the business is every bit as important as making the plan itself. While not all members of the family can be included in the succession plan, it is important for the family to know what to expect and to have you around to explain your decisions. If you do not take the time to explain the “whys” of your plan while you are here, the unanswered questions can lead to real resentment and damaged relationships among family members in the future.
Guilting children into take over the business.
Many parents build a Family Business in the hopes that one day their children will sit at the helm. However, some children don’t want to take control of the business, rather they seek to create an identity that is wholly separate from the Family Business. Trying to coerce your child into taking control of the business when they have no interest can prove detrimental. Your successors should be committed to the business to ensure its continued growth in the years to come.
Asking the business to support more families than it can afford.
Many owner-managed businesses are small and can only support a limited number of families. Expecting the Family Business to support an ever growing number of families can eventually lead to financial ruin. When it comes to taking care of our families it is often difficult to say, “No, we can’t help you.” However, even the healthiest business have a breaking point, and trying to take care of everyone will invariably lead to a depletion of finances that makes it impossible to take care of anyone. As time goes on, a Family Business will be supporting the retired owner-manager, the current owner-manager, and both the older and younger generations alike. Taking on too much financial responsibility can result in an economic downturn for the business and leave everyone unable to support themselves.
Not making decisions that are in the best interest of the family.
The family should be independent from the business entity itself. Even still, making decisions that align with the best interest of the family is of utmost importance. Sometimes it is better for the family if the business does not remain intact. Selling the business to a third party and using the profits to invest in new business for the family members may be in the best interest of the family. Sometimes, selling part of the business to secure a retirement fund for a member and dividing up the remaining parts among those members still personally invested in the business is the best thing to do. What you shouldn’t do, is assume that the best course of action is to keep the business intact and in the family.
Using the right family advisor to develop a family business succession plan is crucial to reduce or eliminate the chance of failure. For over 130 years, The Erskine Company has guided families through the nuances of succession planning and estate management, and protected the family’s wealth. To speak with a succession planning expert, contact The Erskine Company.