Globally, family-owned firms account for about 66 percent of all businesses and 30 percent of the world’s billion-dollar companies. In the U.S. alone, family firms comprise 80 to 90 percent of all business enterprises, generating 64 percent of U.S. gross domestic product and employing 62 percent of the workforce. Given these statistics, family businesses are abundantly important to the economy – today and tomorrow.
That’s why succession must be approached with the utmost care to help ensure the most positive outcomes possible.
Only 16% of Family Firms Have a Succession Plan
Though leaders of many family businesses realize that succession is important, according to the latest PriceWaterhouseCoopers (PWC) survey on family businesses, only half of the 2,400+ top executives polled said a succession plan was in place and only 16 percent called it robust or documented.
Add to this the prediction from Mass Mutual that by 2017, 40.3 percent of family business owners expect to retire, creating a massive transition of ownership in the U.S.
Maybe It's Time to Get a Succession Plan?
What does this all mean? There’s no time like the present to get ahead of the succession curve for family businesses.
Historically, family firm successions have not always gone well. Only 30 percent of family businesses make it to the second generation, just 12 percent survive to the third generation, and a mere 1 percent are viable in the fifth generation. A successful succession is anything but guaranteed.
Six Steps to Build That Plan
With all that is happening among family firms and succession planning, we at Simon Associates thought we would write a series of blogs about the topic. First, let me begin with those six steps. Give them some thought for you and your own company.
Step 1: Start the process early, maybe right now!
Very few leaders of family firms want to think about succession, for countless reasons, including their own mortality, the chance that they might alienate a son or a daughter (or both), or the ultimate challenge of making hard decisions for the company’s future. But planning the succession long before you need to do it will be one of the most prudent moves you make for your business.
Step 2: Consider both ownership and management. Both matter.
While the ownership portion of the plan is usually top of mind, that alone won’t pave the way to a better tomorrow. A future-focused, well-developed business plan will enable the next generation to grow the company effectively for decades to come.
Step 3: Is there a family member right for the CEO job?
It is no longer expected that a son or daughter will take over the business. A 2014 PWC survey found: “The next generation can no longer assume they’ll run the business one day: 73% of those likely to take over the business said they’re looking forward to doing this, but only 35% thought it was definite, and as many as 29% thought it was only fairly likely at best.” How will you know which son or daughter, niece or nephew is right for the top job?
Step 4: The culture of the organization matters.
Culture can play a huge role in the succession decision, both in terms of whom to promote from the family or whether to recruit an external CEO. It’s often important to determine what your culture is like now and how it works (or doesn't), in addition to what that culture should be for the future.
Step 5: Build a plan and review it, often.
Succession plans, even when they’re carefully considered and written, can be misconstrued. Sometimes sons and daughters hear only what they want to hear. Or they assume something will be different when their father or mother retires. Develop opportunities to have your sons or daughters show you that they understand what you’re planning and how you envision it to work in the future. Then empower them to show you how they will transition into the ownership of the company.
Step 6: What are you going to do next?
Map out a plan to hand over some leadership functions. Also, create a special advisory board where you can be involved in policy but not quite as many daily activities. Start working “on” the business instead of “in” the business, looking for other ways to be of value.
Just keep in mind that the intergenerational disconnect in family business communication can be enormous. Research from the Canadian Federation of Independent Business (CFIB) in 2004 showed that 74 percent of the senior leaders of a family business claimed to have a clearly communicated succession plan. But 78 percent of their successors reported that no plan exists!
This indicates a serious gulf of communication between the generations.
I am going to follow up with a blog about each one of these six steps to give you more "how to do" and "why you should."
To read more, check out these posts:
- You Were Always The Favorite…Best Stories About Surviving The Family Business
- Start Your Business With A Family Member
- Andrea Simon, Ph.D., Family Firms Expert, Featured In Newsday Article
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At Simon Associates Management Consultants, we specialize in helping businesses adapt to changing times so they can not just survive but thrive. Please contact us for a $100 1-hour consultation. We look forward to hearing from you.
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