Six Simple Steps for Succession in Family Businesses

Six simple steps for succession in family businesses

This article was first published in our monthly Smart Company column.
We all know the statistics for family business succession planning failure. But succession isn’t a numbers game, it is a planning game – David Harland, Managing Director of FINH

If you work in the family business sector, chances are you run into the same statistics over and over again:

    • Ninety percent of family businesses fail or sell before the third generation takes over.

The data is not pretty — although, as some critical thinkers have pointed out, survival statistics like these have to be put into context from time to time.

What is important to know is that the data does not imply that there is a 90% chance your business will fail before your grandchildren come of age. It is up to you whether you create a successful multigenerational family business. In other words, this is not a numbers game; it is a planning game.

The reason so few family businesses survive to the third generation is they lack planning and communication. Companies fail when they let family conflict and emotion drive change, rather than relying on proven strategies. Your business does not have to be like that. It can, and should, survive a long, long time.

Every family business is different, but the characteristics of good succession planning are universal.

Here are six simple steps that your business should incorporate.

Step 1: Treat succession planning like it is urgent

A family business ignoring its succession plan is akin to a 30-year-old worker ignoring his retirement plan. Both events (succession and retirement) seem like they are a long way off, but the reality is that ignoring the early years can lead to major problems down the road.

Why do so many family businesses ignore or put off succession planning? I have noticed several reasons.

First, many people underestimate how extensive succession planning is. A proactive succession planning process allows organisations to reduce the impact of an owner or major team member, help buffer the company from dramatic changes in business circumstances, as well as prepare targeted individuals for future advancement.

One reason so many enterprises ignore succession planning is that it can be uncomfortable. Family conflicts occur even in the healthiest businesses, and the succession process is full of potential pitfalls and mental roadblocks unless you know what you are doing. As such, you will likely need someone to guide you through the complexities. Someone whose expertise and impartiality help build trust and smooth conflict between members.

Step 2: Plan for a process, not an event

Too many families treat succession like it is a long-off, lofty goal. They think “someday, the children will have to take over,” or “ideally, the business will operate smoothly enough for my son/daughter to grab the wheel”.

Such a mindset is unfortunate because it treats succession as an event, not a process. However, as Family Business Australia points out, the major influences on succession all require a lot of planning and preparation. Specifically, FBA shows that transitioning business owners are concerned about:

    • Generating adequate financial returns;
    • Having sufficient trust in potential successors; and
    • Receiving enough interest from potential successors to take over the business.

You also need time to figure out the legal and tax issues associated with succession and, if it is the right time for the founder, retirement. This means estate planning and equity transfers.

Step 3: Rally around your family values

Strong family businesses create a sense of shared values — the kinds of values that survive beyond one owner. As you sit down to prepare a succession plan, take note of the moral and governing philosophies that guide your enterprise.

Your family values are more than a slogan. During times of conflict or struggle, your leadership and family employees will rally around your family values, using them as a guidepost for making tough decisions. Do family unity and collective agreement matter more than generating extra revenue? Should younger family members be forced to work outside the business before they can assume control?

Think about your succession plan as an opportunity to create a compass that your family gets to carry from generation to generation.

Step 4: Hold meetings and discuss succession

A really good succession planning process boils down to involving and communicating with your family members no matter which generation they belong to or their immediate contributions to the firm.

Keep in mind — and this is very important — that it is not the role of the present leadership to micromanage the meeting process. You want every influential member of the firm and family to be able to speak openly and offer their opinion.

It is uncomfortable and unproductive whenever the current patriarch or matriarch runs an entire meeting only to find out later that many people wanted to offer constructive thoughts, except they did not feel comfortable doing so.

If you have an expert trusted adviser (or better still, a family business adviser) I strongly suggest you ask them to facilitate these meetings. Remember, for most members of the business, this will be the first time going through a succession. It is valuable to have an expert guide you and help build trust / settle conflict between members.

Step 5: Educate your family

I believe education is the foundation of a successful transition. Without training and learning, people struggle to contextualise what they need to do in the succession process.

Your family must be educated enough to perform the following tasks:

    • Handle conflict, whether for family or business reasons;
    • Accept positions of responsibility in the company;
    • Act as advocates for the business no matter their present responsibilities; and
    • See the family business as a living legacy, with an interconnected past and future.

Step 6: Develop a written family constitution

The best way to cement your succession plan is to construct it in conjunction with a written family constitution.

The constitution serves two functions:

    1. It acts as a governing document that promotes ongoing family business continuity. This means establishing an initial plan as well as identifying fall-back plans and means of settling conflicts or making difficult decisions; and
    1. It defines and emphasises family values. You must make clear your family values in concrete terms so that everyone — family, non-family employees and directors, and customers — knows what you believe and how you conduct your business.

For Advice on succession in your family business please call FINH 07 3229 7333.