You’ve no doubt heard it quoted that only three percent of family-held businesses remain in business past the third generation. Whether this statistic is in fact correct is debated around the world by academics and the business community and its advisors.
Apparently, the original statistic of 30/13/3 was from research conducted in the late 1980s based on a small dataset of businesses in Illinois, USA. This research, since becoming almost gospel, attests that 30 percent of family-held businesses survive past one generation, 13 percent past two, and 3 percent past three.
Whether the figures are correct is probably irrelevant, what is important to understand is that creating an enduring legacy business is very difficult. And family-held businesses are potentially even harder to sustain.
Which is why, getting a clear succession plan in place early on is crucial if you want your business success to be maintained, built on and enjoyed by subsequent generations. Easy to say but very much harder to do. Here’s why.
Family-held businesses are different
What constitutes success is often broader than a ‘for profit’ business. It’s not just about the money at the end of the day. It can often be about creating the legacy, of two or three generations working together, providing employment for family members.
Families have dynamics, that’s what a family is. And these dynamics are brought into the business. It can be particularly difficult for a subsequent generation to direct the actions of their parent, or grandparent or for the elders to accept the decisions made by the younger member who to them is the ‘child’ or ‘grandchild’.
There may be an expectation that investment in the business will be of long-term, patient capital – the older generation having no expectation to turn a quick profit, instead being prepared to wait, with an implicit understanding that they will be ‘looked after’ in their later years.
There is also significant risk and consequences of getting the governance and succession planning wrong when looking within a family. And dealing with generational short and long-term expectations can be especially fraught.
So, what’s the route to successful survival?
What makes a sustainable family-held business?
Prof. Dr. Thomas Zellweger holds the Chair in Family Business at the University of St.Gallen, Switzerland and is acknowledged as an international leader in this field. His research says that 60 percent of failures in succession are attributable to how the family members interact; 25 percent are caused by inadequately prepared heirs; 12 percent due to lack of a family mission or purpose that clearly defines use of family wealth; and 3 percent or less caused by incompetent advisors, lawyers or accountants.
Having an exit strategy as early as possible (if not at the start of a business) is a 101 of business ownership. This should also be true for a family-held business, but succession planning is often left far too late. In my experience, developing a successful strategy can take up to five years if it is to be ‘sticky’ and allow a legacy business to thrive indefinitely.
It is an emotive process involving the sensitive subjects in life that people tend to avoid – mortality, change and money – made more difficult by differing generational expectations.
Having an impartial advisor that can help navigate the generations around the emotional issues can be extremely beneficial. Irrespective of engaging a facilitator or not, there are some key questions that need to be addressed. It can be challenging and time consuming to distil the answers and viewpoints from the two, three or more generations involved.
Answering the key questions
As every family is different in its dynamics, so too is a family-held business. Some of the key questions that I start with are:
- What are your family’s aspirations?
- What are your family’s aspirations for the business?
- Do you see it as a family business or are you a business family?
- What does each generation expect?
- What is the role or contribution of participating family members?
- What role or contribution do family members who aren’t actively involved have?
- What does ‘success’ look like for the different generations?
Establishing a family charter
My starting point is to create a family charter. This sets out a common understanding between family members in relation to certain key issues. It provides a blueprint of what the family stands for and its values. It should become a guiding principle in family and business dealings.
It is important that all relevant family members are involved in its development as all should be guided by it. And the family charter and its values should then be reflected in the family business values.
The importance of the right successor
As attested by Zellweger, a quarter of family-held businesses flounder because of ill-prepared successors. Just because a younger generation has worked in the business, or even just because they are family, does not make them best prepared to succeed.
There should be a defined process for choosing the right successor/s. It is imperative for ongoing success that family members should not progress up the business to senior positions if they don’t have the skill set.
Making sure roles are clearly defined is one step to help alleviate this proposition. Another is to create a personal development plan for each successor/s. Having a leadership development plan with specific training listed will help successor/s strengthen and improve what they can bring to the business. Ongoing coaching and mentoring are also important.
It’s also essential that there is an evolution of leadership between the founder and successor; the chances of a retiring leader ‘handing over the business’ to a successor/s carte blanche is rarely successful, there needs to be a gradual and planned transitioning of leadership responsibility and authority.
In addition, it’s important to retain and reward key people – family and non-family – to ensure the business IP is retained from successive generation to the next.
And with all leadership, communication is critical. Succession details should be communicated clearly to all key people within the business and family to ensure smooth transitions.
A successful outcome
Succession planning is a complex and often emotionally fraught business. But the benefits include:
- survival and growth of the business
- retaining harmony within a family
- minimisation of tax obligations
- setting up for the retirement the founder / older generation envisaged.
A well-designed family-held business succession plan can articulate the vision and values of the founders and help ensure a smooth transition to the next generation. There are many examples where careful and sometimes innovative planning has led to the aggregation of wealth and inter-generational prosperity for future generations of the family and the communities in which they live and work.
I found this video insightful - Thomas Zellweger, Professor of Business Administration with specialisation in Family Business, KMU-HSG and CFB-HSG, explains different forms of succession and why businesses should follow a six-step-process.
If you’re a family-held business and want to discuss how to establish a successful succession plan, we’ve got the experience to help.
Contact your Moore Markhams advisor here.
Prepared by Atul Mehta, a Moore Markhams director. Atul has a keen interest in working with business owners in business acquisition and longevity. He is skilled in corporate governance and holds various board directorships.