Running a family business is no walk in the park. The family dinners or holiday gatherings could be mistaken for board room meetings, with topics of conversation jumping between family matters and minute business topics.
Discussions get further complicated when it comes time for a transition of ownership as the first generation of family businesses starts to look towards retirement and relinquishing control of day-to-day activities. Who will step in to lead the company?
A number of family business succession issues arise, from siblings quarreling about how to divide up the business and inheritance to instability within the organization as employees wonder what their future holds.
Yet, so many family owned businesses don’t have a solid succession plan.
Problems in Family Business Succession Planning
Some owners prepare to sell the family business and about 30% of U.S. family-owned businesses turn into second-generation businesses, but often not without complication.
When you peel back the layers, the emotions and history of a family are always at the center.
Ed Pendergast, a board executive who has sat on eight family boards and advised many more family businesses, often sees one or more family members feel that they are not being treated fairly by other family members. Whether it’s viewed as a grudge or just selective memory, these power dynamics among the next generation in line can cause headaches for the business.
But surprisingly, Pendergast doesn’t view the second generation as the biggest challenge: “It’s actually the third generation with the hardest road ahead,” he says. “The first generation runs the business and passes it on to the second generation. And then by the time the second is trying to figure out who to pass it on to, family member A has three kids, family member B has two, and family member C has none. Who’s going to be in the business? It becomes much more complex the more people are involved.”
The numbers show just how difficult this transition is. Approximately 12% of family-owned businesses are passed down successfully to a third generation and only 3% to a fourth or beyond.
Best Practices for Family Business Succession Planning
So how can families avoid the common pitfalls in succession planning, and instead focus on best practices?
Ramp Up Communication
To ensure a smooth handoff to new generations coming into the mix, one of the first things a family business should focus on is establishing transparency and ensuring knowledge of the business’ success and pain points are shared among family members.
Pendergast suggests setting the standard to that of a public company when it comes to board meetings: “The more clear the rules are, the less controversy there is,” he says. “Clearly, you can’t give a non-working member of the family everything that is going on at every minute. But the more you treat it like a public company, as far as communication of information, the better off it is.”
All too often, family members in the business are reluctant to be very clear about all issues up, down, sideways. But Pendergast says when something goes wrong it becomes a big surprise to the other family members and causes disputes.
Best practice is to establish a cadence of company updates even before the succession planning process begins.
Make Way for Change
The business that was built over the past 40 years will need to refine its approach to take on the next 40 years.
Bob Crawford, an executive who succeeded his father as CEO of Brook Furniture Rental and took it successfully through a sale, describes how building on the legacy that was already in place was important.
“You want to know that you matter, that you did something that lasted longer than yourself. Did I create something worthy of the next generation? And I think if you’re a real builder, you want to see that,” he says adding that living in a diverse, incredibly dynamic, capitalistic system means that things don’t sit still. “You also have to realize part of a business has to be to change and morph as well. That can also be a legacy.”
The challenge arises when family businesses associate the idea of legacy with no room for innovation or change.
The most successful businesses will empower the next generation to grow, pivot, and expand, and leave their own unique stamp on the business.
Prepare and Practice Prioritization
Once Brook Furniture Rental grew to a certain level, Bob Crawford said his father had a very good self-awareness that he was not the right person to move the business forward, and that he actually could do the opposite — get in the way of future growth.
“That was a very important thing for me to understand before I joined, because I knew — I had a hunch — that there was probably a lot of practices that we were implementing that probably weren’t going to get us to the next level,” he says.
Having a good understanding of where they sat and where they wanted to go helped Crawford and his father think through, prioritize, and sequence actions, initiatives, and strategies. That also meant preparing for bumpy roads ahead.
“We knew that we were going to have disagreements. We knew that the old was going to collide with the new and we embraced it, we expected it,” he says.
Be Open to Outsiders
One of the keys to a smooth transition from generation to generation is setting up how to deal with certain scenarios, which can remove any emotion that is bound to arise. Pendergast gives an example of a business struggling with who does what within the organization and pointed to one company he worked with that required any family member who wanted a role within the family business to get a job someplace else for a period of time and get promoted at least once.
“They come into the business knowing what it’s like outside the family. They have an initial measure of success, so they’re more likely to understand their roles,” he says.
Many families choose to prepare for these what-if scenarios by engaging an outside, objective leader who specializes in consulting with family businesses and advising them on a professional level. This preparation can pay off and avoid a future legal battle, which Pendergast says can become contentious very quickly once the family calls a lawyer in.
Put Family First
When Ed Pendergast’s uncle passed away, he left a business behind for his children along with a note telling them the family was more important than business.
“It was pretty wise because it ended up they couldn’t get along so ultimately, they actually sold the company and there was considerably less family discord after that,” Pendergast says, adding that businesses may need to think about selling to or buying out one of the other family members to eliminate any conflict.
Whatever the right outcome is, the challenges around succession planning are real and can be emotionally charged and all consuming, but preparation is key, and in the end, family comes first.