The majority of privately-held companies in the United States are family-owned, and over 60 percent of these family-owned businesses intend to pass their company’s ownership and leadership to the next generation. However, studies have shown that only a third of family businesses remain successful with the second generation at the helm, and even fewer survive future generational transfers.
This lack of success can partly be attributed to the absence of proper planning that is necessary for family-owned business succession. In many cases, current ownership is too comfortable and lax about the transition, because they know the next generation is waiting in the wings and assumes they will be ready to take over when the time comes.
On the contrary, these transitions are generally more complicated and require additional care. Family-owned businesses embody legacy, which can be extremely important to all parties involved. This adds an element of emotion that is not always present in non-family transactions. This heightened emotional element requires careful consideration when devising a succession plan in order to ensure the future success of the business, and to preserve family harmony outside of the business.
When planning for a family-owned business transfer, there are two elements that are typically tied together: the leadership of the business and the ownership of the business. This is particularly true in a first generation business, when the leadership and ownership usually reside in the same individual. This can lead to a presumption that the next owner will also be the business’s leader, which inherently limits the number of suitors for the leadership position. If that person turns out to be the “wrong” person for the job, it will decrease the odds of the next generation succeeding.
There are also cases where the current owner has several children, which creates the burning question of who will be the next leader. This topic can be very taboo and the parent may be reluctant to take any action in an attempt to preserve feelings.
It may be wise to mentally separate “owner” and “leader” and at least consider not having the same individual occupy both roles. In many cases, it will be ideal for them to be the same. But it is equally important to preserve the continuation of the business. If the next generation is not suited to be a future leader, they can instead acquire ownership and serve on the board of directors, or work in the business in a non-leadership position that is more conducive to their particular skill sets.
Ultimately, transparency is a key factor in a successful family business transition. If continued family involvement is important, then communication needs to be clear with all interested parties for at least five years leading up to the actual transition. Everyone should understand the timeframe of the transition, the future ownership, and the future leadership. In addition, give consideration to the long-term goals and objectives of everyone involved to ensure a successful family transition and to reduce its emotional toll.
Brian J. Sharkey is a Director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
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