10 Capital Succession Errors and 10 Ways to Avoid Them

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10 Capital Succession  Errors and 10 Ways to Avoid Them
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No competitor, technological disrupter or economic downturn is as great a threat to family business survival as the transition from one generation to the next. We know that on average only two-thirds of family businesses make it to the second generation, and with each subsequent generation, that ratio continues to fall. Only thirty per cent of family businesses survive into the third generation, fifteen per cent into the fourth generation and four per cent into the fifth generation. Conversely, this means that 96 per cent of family firms cease to exist within five generations.

Often, their failure to survive these generational hurdles is the result of poor succession planning. Part of the problem lies in the fact that succession happens so infrequently. It’s hard to practice for something that only occurs twice in an entrepreneur’s lifetime.

That said, knowing what not to do is a powerful place to start. If family businesses can avoid these ten recurring, capital mistakes, the probability of their surviving the succession process rises considerably:

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1. Sense of Immortality

Some entrepreneurs behave as if they’ll live forever, and are still leading their companies at the advanced age of seventy-five and older. In many cases, these aged founders are surrounded by managers and employees who pick up the slack but don’t speak out. For the most part, these firms have already failed at succession.

When analysing long-living companies, there is one observation to be made: successful businesses always outlive their founders.

Our advice: Don’t wait until you are not fit enough to start the handover. Succession requires strength and clarity. Prioritise the transition starting at 60.

2. Non-binding Words

Is talking silver and silence gold? Not when it comes to succession. Succession must address both the “soft issues”, the relational and emotional matters, as well as the “hard facts”, including ownership, leadership and governance.

Communication is key, and the most precise way to communicate is with a pen. Spoken words are volatile, prone to misinterpretation and not necessarily binding.

Our advice: Write it down. The written word mitigates ambiguity, especially in governance. Family Constitutions, where the central issues, including timing are dealt with and defined, are a vital part of a successful transition.

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3. Secrecy

All members of the family must be included in the succession process. Compete transparency regarding personal expectations about individual roles within the company is a must. Hiding things harms the process – there should be no surprises.

Our advice: If open conversation among family members is inhibited for any reason, get help from external family business experts. A greater degree of transparency translates to the increased likelihood of a successful transition.

4. Aversion to Conflict

Harmony is a key pillar in the succession process, but maintaining harmony at all costs is detrimental. Without constructive, positive conflict harmony won’t last. This means that everyone needs to express their opinions. The common path can only be found through discussion and debate.

Our advice: families must learn how to argue on the grounds of a trusting culture and a strong family bond. Furthermore, there are other ways to build family unity. Financial and behavioural generosity, if practised and recognised as such by all people involved in the process, is an enforcer of harmony.

5. Differentiation

Often, succession is thought of as both succession in ownership and leadership. This might be the ideal scenario, but the transition doesn’t necessarily have to include both at the same time.

Our advice: Differentiation between the two should be considered. Inheriting a company or shares of a company does not automatically qualify a person for leadership. Skills, experience, know-how, will-power and personality are more important. Often, non-family-executives are a better fit.

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6. Injustice

Sometimes, a family business heir feels they receive less than they are entitled to. There are cases where a perceived injustice is digestible and has no negative outcome for family harmony. However, if the value of assets left to heirs differs too much, then the objective injustice inevitably leads to conflict.

Our advice: Be aware that justice is often measured in the value of assets left to each family member. Furthermore, each and every family member involved in succession planning has a responsibility to see that assets are distributed in a just way.

7. Ego

Those who do not strive for good relationships in the family, company and society as a whole will not get far with their family business. Neither success nor family affiliation justifies arrogance. Hard work, dedication, competence and good manners are the defining traits of a successful entrepreneur.

Our advice: Unilateral decision-making as a company owner and leader or as a potential successor and entrepreneurial family member is poor practice. If you are not able to convince with argument do not make an autocratic decision.

8. Remember Customers

Even though succession is a potential threat to family business survival, families need to pay attention and not neglect their business. Companies are not meant to serve entrepreneurial families. Instead, they exist to serve their customers.

Our advice: don’t forget about customers through the succession process. If you lose customer focus, there might not be anything left to hand over to the next generation.

9. Attractiveness

If the company is unattractive, if it is not healthy, if it lacks unique competitive advantages, then why should the younger generation take over? Bad companies find neither buyers nor successors. Conversely, successful companies are attractive, and successors might be longing to get in as soon as possible.

Our advice: Make sure the company is visibly attractive. Live this attractiveness on a day to day basis and communicate it to the next generation through your enthusiasm.

10. Inconsistency

Once a succession plan is set up, and the family comes to an agreement, the worst thing that can happen is not executing that decision. Unfortunately, failure to implement a well thought out succession plan happens quite often.

Our advice: once decisions are made, implementation steps and timelines need to be set. Milestones and check-up meetings should be scheduled. Competent external support can be critical in this last phase of a successful transition.

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A Starting Point

Avoiding these ten capital mistakes does not guarantee survival, but it does make survival more likely. Succession in family companies is not something to be accomplished in your spare time. It’s hard work for everyone involved and requires good-will, concentration, competence and structure.

Markus Weishaupt
Image Courtesy of Markus Weishaupt

Prof. (FH) Dott. Markus Weishaupt is a family business expert, Partner and CEO of Weissman International. He accompanies family businesses as well as entrepreneurial families in their cultural, strategic, organisational and leadership challenges in his role as an international consultant and as a member of family and company boards. He is Professor at the University of Applied Sciences in Kufstein (Tirol-Austria), author and speaker on issues concerning the world of family businesses.