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Avoid the risks in handing down the family business
In a survey by the Family Owned Business Institute, family business owners were asked if the business was meant to be handed down within the family or families that own it. Overall, 80 percent said they intended to hand it off to the next generation to begin a process of handing a legacy down with each passing generation.
But if this is the belief, why is it according to recent statistics only 30 percent of family-owned businesses survive into the second generation, 12 percent are viable into the third generation and only 3 percent of all family businesses operate into the fourth generation or beyond? These statistics show there is a massive disconnect between the optimistic belief of today's family business owners and the reality of the enormous failure of family companies to survive through the generations.
The reason could very well be that of the 80 percent of business owners who said they had the desire to pass off the company to their children, only 20 percent stated they had a succession plan in place should the company come to an abrupt end due to death or a severe disability.
According to the Family Owned Business Institute, when business owners were asked why they don't have succession plans, they responded that "time to deal with the issue" was a significant constraint. Other reasons mentioned:
- Too early to plan
- Can't find adequate advice/tools to start
- Too complex
- Don't want to think about leaving
- Conflict with family or employees
But those factors could be the very reason the business starts a downward spiral. If the owner passes away and is the key contributor to the company's success, banks and investors — who have forged relationships over the years — may turn away from working with someone new. If the person who suddenly takes over — a senior manager, a sibling, a son or daughter, a spouse who has good intentions but no experience — is not up to the task they have been thrown into prematurely, how will the company survive this seismic shift in its management?
What they need to do is answer the question aimed at all business owners: "What do I want to do with the business when I step down?" There are three options; Pass it off to my children, sell it to the employees or sell it outright (to a competitor). But it's not a choice one can levy from beyond the grave or put on a backburner for a long period of time.
According to a survey by Mass Mutual, about 40 percent of family businesses expect the leadership of their companies to change hands within the next five years. Well over half expect a leadership change within 10 years.
With more than four out of five businesses still controlled by their founders, it won't be easy for the next generation to replace them. Effective communication between sibling partners is greater than in the case of a sole owner. The survey also found that one-third of the companies had a chief executive older than 60, and the average age was 54. Only 11 percent were under 41, and another 11 percent were older than 71. About 88 percent of the survey respondents believe the same family or families will control the business in five years.
If 88 percent of business owners believe someone in their family will take over the business, then why would only 30 percent of the succeeding generations handed the business pass on the legacy?
The answer could be as simple as the second generation has no family to pass it on to. The more likely scenario is that the succeeding generation doesn't have the same fire and passion as the family member that possibly built his business from scratch, maybe even came over as an immigrant, and by doing so was fueled by the fear of losing everything, of being unable to provide for his family. Perhaps the son or daughter has cultivated other interests and the dream of the parents is not the dream of the children.
Family businesses are as different as the families who own them. But they share some common threads: a passion for making a difference in their community, a deep connection with their employees and the desire to leave a legacy.
Many family businesses find a good support system from a network of other business owners and family business advisors at organizations like the Family Business Alliance, whose mission is to connect them with the resources and support they need to be successful into the next generation. They provide opportunities to join like-minded family business leaders who “get it.” They also offer seminars and workshops tailored to the opportunities — and challenges — family businesses face.
Here are the steps needed to make sure family-owned businesses can put a plan in place to continue to prosper and avoid the risks of handing down the family business.
Step 1: Establish goals and objectives
Step 2: Establish a decision-making process
Step 3: Establish the succession plan
Step 4: Create a business and owner estate plan
Step 5: Create a transition plan
Not all family businesses will survive from one generation to another, but taking these five steps will ensure the continued success of a family business for years to come.
Randy Boss is a certified risk architect and partner at Ottawa Kent in Jenison. He volunteers as a Next Generation Peer Group facilitator for the Family Business Alliance and can be reached at email@example.com.