Pitfalls of Family Business Succession

Any successful family-owned business founder can look back proudly on the years of blood, sweat, and tears that have been poured into building the organization. But initial success is by no means a guarantee that the company will flourish 20, 50, or 100 years down the road. Too often, all the focus is on the current state of the business and not enough attention has been paid to ensuring the company will be just as successful when the future generations take the reins after undergoing a succession process.

Many of us have already heard the commonly cited factoid that “90% of family businesses will not make it to the 3rd generation.” Whether this statistic is true or not, the fact of the matter is that succession does require careful planning because plenty can go wrong in the process.

Be on the lookout for these seven pitfalls when turning the family business over to the next generation.

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1. Last-Minute Planning

The old adage that says ‘when you fail to plan, you plan to fail’ is very apt when it comes to family-owned business succession. This is not something can be effectively handled as one of the last things you do as you head out the door.

There is much work to be done to lay the ground work in terms of management succession and ownership succession, not to mention all of the organizational logistics that need to be worked out.

Some have said the time to start succession planning is the day you open your business. That would be nice but most people can be successful if they start the process 3-5 years before the actual transition.

2. Dividing Everything Evenly Amongst Heirs

This may seem like the best and most noble course of action but, in reality, it’s one of the biggest mistakes family business owners make when it comes to succession. It may be okay to divide everything evenly when it comes to ownership but in terms of management and day to day responsibilities, you’ll want to have a clear hierarchy.

The biggest reason is because there is often an erroneous assumption that all the heirs are equally enthused in the prospect of running the family business. Quite often, that is not the case and so when those less enthused are not working as hard as the others, it causes resentment within the organization. It also assumes each is equally qualified to guide the company into the challenges of tomorrow.

It’s best to have a conversation with all the heirs to determine their level of interest and core competencies. Following which, there should be a clear delineation as to who is in charge for the betterment of all involved.

3. Keeping The Next Generation at Arm’s Length Until the Very End

One of the most important reasons for not waiting until the last minute is so the person eventually taking over can be brought in well in advance and take on real responsibilities. There will be a tendency for the outgoing CEO to want to maintain total control until the dying days of his tenure. This would be a tremendous missed opportunity.

The next generation leadership will need to cultivate contacts, work with suppliers, and build a rapport with the workforce. This can only be done by bringing them to the inner-fold and take on real responsibilities within the organization.

4. Not Establishing Clear Goals and Objectives

The most successful enterprises are those that have a long-term vision and buy-in from all levels of the organization so they are all pulling in the same direction. What often happens when a business is transitioned to the next generation is a sudden change of course which confuses those who are still there and angers those who stepped aside.

This is why the points we have already touched on: planning early, discussing responsibilities with family, and bringing in the successor early are all so important. If there is a clear vision for the future direction of the company and everyone is clear on the organization and management structure moving forward, there should be smooth sailing in the weeks and months after the transition.

5. Deciding Succession Solely on Tax/Cost Savings Analysis

There are two aspects to consider when transitioning a family-owned business: (1) the technical component which is all the legal, estate and tax considerations of the move and (2) The family component which is the family relationships both inside and outside the organization.

Too often, decisions are made based on consideration of the former but not the latter. There very well may be compelling tax or legal reasons why one heir may be a preferable successor over the other. But if the family component considerations aren’t equally considered, there is a good chance of family conflict down the road.

Perhaps the preferred heir has children entering school and the family needs a more flexible schedule. These are the factors that cannot be glossed over in the decision-making process.

6. Keeping Your Exit Plans To Yourself

Entrepreneurs are often lone wolves who built the company with their own two hands. They often have to keep their cards close to their vest for fear of leaked information hurting the business. This rationale is often why they are reluctant to indicate their retirement plans well in advance.

Unfortunately, this line of thinking does not make for a smooth or effective succession. For all the reasons listed above, it takes a village for an effective succession and that means bringing people in well in advance.

7. Refusing to Accept Outside Help

Going hand in hand with the lone wolf mentality is the skepticism of bringing in ‘outsiders’ to help with the succession planning. Family business owners are naturally predisposed to ‘keeping it in the family’. More often than not, this is a huge mistake.

There are outside consultants who have expertise in this field and can be an effective guide through this daunting process. Family owned businesses share the same challenges and issues when it comes to succession so there is no need to re-invent the wheel. Don’t be afraid to use the help of those who have been through it all before.