Next in Line for the Family Business

There’s an old saying about a family business that is often true: “The first generation starts it, the second generation manages it, and the third generation shuts the doors.” In fact, only about 30 percent of businesses are passed on to the second generation, and only about 15 percent make it to the third generation of the family. Yet there are a number of reasons for a small business proprietor to want to involve other family members in the business.

First, they’re often a convenient source of labor and can begin working in the family business at an early age during school holidays. Secondly there’s the element of family loyalty that means the owner should be able to trust them better than someone outside the family. It’s also a case of “the devil you know” since the owner is well aware of the family members’ strengths and weaknesses.

Why doesn’t this situation always result in the family business being passed from one generation to the next like other assets? Too often the shutting of the family business doors results from poor succession planning — a failure to select and prepare the members of the succeeding generations for managing the business. Naturally it’s not possible for all family-owned businesses to be passed on to other members of the family. Some businesses don’t survive long enough; others are simply not a good fit with the talents and abilities of the next generation. But what an opportunity a business represents for all members of the family if it can stay in the ownership of the same family and be successfully run by the next generation, and the next and so on.

Family businesses can fall apart or be taken over by outsiders for many reasons. It may be difficult to get cohesive management out of a family group where some members are insufficiently concerned with the business or simply lack the abilities to run it. Disputes within a family about how to run the business can lead to destructive infighting, and even tax laws in some countries can lead to a breaking up of the business when the owner dies. Where succession planning is successful, a business owner may be able to retire with a secure source of income and even continue in an advisory position to successors who continue to run the family business. Family conflicts will be minimized and the tax demands on the business will not threaten its existence.

Succession planning is a process. It needs to begin long before family members find themselves in a crisis meeting arguing about who’s going to take over management because the founder’s had a heart attack. It’s extremely difficult to resolve all the issues when a business is in a crisis and family members are dealing with deep grief. A smooth transition needs to be organized well in advance of the time it takes place. The successor must be agreed upon to prevent conflicts, then prepared and given the skills that will enable them to be a good CEO. Predictable family issues such as rivalry and jealousy need to be addressed in advance, calmly and deliberately, and a resolution found that will be acceptable to everybody.

Everything about the succession has to be legally compliant and formally documented to avoid later disputes. Succession planning also needs to be handled in a way that will benefit the future business. For example, it may not be a bad idea to bring outsiders onto the board of a family business to acquire crucial expertise essential to business growth. It may also be a good idea for certain family members to remove themselves from management positions.

Forward planning can give all members of the family a fair assessment of how much time and effort they should invest in a business, and an idea of what their long-term rewards are likely to be. This will minimize the chance of bitterness and recriminations when ownership and power is transferred according to the plan that’s been pre-arranged.

This kind of planning also gives the business its best chance to survive the period of transition without being negatively affected by whatever changes have to be made. It creates a new vision for the future of the business and enables all work-in-progress to be continued under the new management.

The key thing to remember about succession planning is that it’s going to involve highly complex legal and accounting issues. This means that professional advice needs to be sought at a very early stage so that every option can be explored and the best plan for succession can be achieved.

Copyright 2005, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com