Today’s family businesses have to clear a lot of hurdles if they want their company to survive in the hands of the next generation. They face problems created by globalisation, potential economic stagnation, demographic shifts, and changing consumer preferences.
The first and largest barrier, however, is succession. The transfer of management and ownership of the business to the next generation is paramount to continued success.
Unfortunately, far too many family businesses are ill-prepared to execute a succession plan. According to Deloitte, 64% of next generation leaders will assume control of their family business without a formal succession plan.
Why is succession planning so difficult?
Lack of professional advice
Past generations of family businesses may have survived without formal, professional succession plans. The old economy was slower and family bonds tended to be stronger—children joined the family business early and expected to follow in their parents footsteps. Typically, the eldest son took over the reigns without much fanfare.
The modern family business space is qualitatively and quantitatively different. Globalisation and technical innovation expose businesses to ever-more disruption and innovative competition. At the same time, children feel compelled to carve their own path rather than inherit their parent’s responsibilities. Suddenly, the path to inter-generational succession is murkier than ever.
Many families react to this uncertainty by pursuing one unattractive path or another. Some ignore the problem of succession, leaving it to fester. Others attempt to make up succession plans as they go. Once you consider that 90% of family businesses fail before the third generation, however, this “re-invent the wheel” approach is a long shot to work.
Too much focus on the technical side of succession
In his book Perpetuating the Family Business, John L. Ward wrote:“The most critical issues facing business-owning families are family-based issues more than they are business-based issues”.
You must understand Ward’s insight if you really want to get to the bottom of family business succession.
At their best or worst, family businesses are powerful, emotional vehicles. They can transmit Sunday-school virtue from love to generosity, compassion, forgiveness, hard work, and kindness. They can also be altars of pride, fear, jealousy, and selfishness.
Too many family business owners (and professional advisors) focus their attention on technical components, such as family trusts, wealth management, tax mitigation, or asset distribution. While the business components are necessary and important, the real test will be how a family manages expectations and interpersonal dynamics.
Clearly, family businesses are different because of the family component. Those families who best understand and formally address the family component are more likely to outperform their competitors and successfully transfer the business to the next generation.
Conflict over vision
When the University of South Australia and KPMG conducted a survey in 2015 they found 80% of family businesses experienced more conflict in the past 12 months than in the 12 preceding months.
The survey identified three major sources of conflict: goals, values, and vision.
Vision and values are not incidental. Strong families begin fostering a family vision early on, and they reinforce that vision through their personal and professional conduct. Family values are just as important in a business setting as they are at home. If you want the business to survive and thrive beyond one owner, you need shared values.
Founders, spouses, children, and even non-family employees need a cause greater than themselves around which to circle and bond. This is one area where a written family constitution can work wonders.
Millennial and Gen X children grew up in a radically different world than their parents, and those differences translate to the professional world too. Less than one third of next-generation leaders have been preparing for business leadership at a young age. Less than half had begun learning by the time their working careers began.
Even today, the majority of family businesses owners want to see their children in positions of leadership, even if at the expense of competent non-family members. Part of following that path needs to be a recognition that the current owner is responsible for helping prepare their children for the challenge.
David Harland CPA is managing director of FINH, an organisation that specialises in the provision of advice to family business across the Asia-Pacific region.