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  • Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 11/18/2013

Family businesses’ continued struggles with effective succession strategies 

Effective succession strategies
If you own a family business, a succession plan might not be high on your priority list or you might think that you don’t need to worry about the future right now. However, as the old saying goes: those that fail to plan, plan to fail.

It’s important that you put in place a succession plan in case you’re no longer able to work in your business or decide to retire but you want the business to continue. A lack of succession planning is one of the major risks to any family business.

Effective succession strategies

According to the Family Business Institute:


“88% of current family business owners believe the same family or families will control their business in five years, but succession statistics undermine this belief. Only about 30% of family and businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.


The statistics reveal a disconnect between the optimistic belief of today’s family business owners and the reality of the massive failure of family companies to survive through the generations. Research indicates that family business failures can essentially be traced to one factor: an unfortunate lack of family business succession planning.”

Prioritise a succession plan

The reality is that the majority of family businesses fail to survive through the generations. Sometimes this is due to younger family members not having an interest in running the business, but in most cases it’s due to the lack of creating a plan for the future.


If you want your business to survive beyond your input, to continue to give your future generations an income, you have to proactively focus on selecting and grooming a successor. ‘Passing the torch’ is not a quick or easy process.


Considerations include the technical; for example company taxes, retirement financing, inheritance taxes, credit rating, and the use of investor shares, as well as the emotional; worries over the effects of the business owner’s retirement or death.

Don’t throw the business out with the bathwater

In a family-owned business, succession can be even more sensitive because of the complex web of interpersonal, generational relationships. Each business has unique requirements that can only be met through a tailored succession plan that considers personal needs, the requirements of the business, and the demands of ownership transition.


The following steps can help you to put a succession plan in place:


  • Carefully evaluate the business’ vision and goals to understand who would be best suited to taking on the leadership position. Add to this an examination of future skills and management requirements for continuing the business.
  • Develop a document explaining your succession plan, including reasons for your decision.
  • Don’t do all the planning in isolation. Invite comment from your executive team and selected staff members to ensure that the planning process benefits from different experiences and perspectives.

Survival through the generations of family

Get expert and legal help if necessary. This is especially important if you have business partners or investors who will need to have a say in the future of the business. Engage in a frank and open discussion with invested members, including your children, stakeholders, board members, and employees.


To avoid conflict at a later stage, a succession plan should not be a secret. And in the case that you pass the reins to one child over others, it’s important to explain why this is the case and what the other children will receive in lieu of a stake in the business.


Your succession plan needs to be an active document and a regular part of board discussions as it will inform the training, hiring, and mentoring aspects of your business. When the plan is needed, it should be relatively easy for the responsible individuals to put the plan into action, ensuring that the business is given the best possible chance of longevity.


So if you won’t be around forever, plan for succession – don’t throw the business out with the bathwater.

 

Christophe Bernard

Christophe Bernard
I am a KPMG partner based in the French firm’s Paris office, responsible for encouraging the growth of our firms’ middle markets practice across Europe, Middle East and Africa, a majority of that market comprises of family businesses.
 

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