It never ceases to fascinate me that so many entrepreneurs who have literally invested their hearts and souls into forming, growing and running immensely successful businesses, fail to take that one small but-oh-so-vital step of developing a workable succession plan. It’s estimated that somewhere between 65% and 80% of all businesses are family-owned and, given that company records are literally littered with stories of failed family businesses and vicious inter-generational disputes, logic would reason that family-owned businesses are more desperate candidates for succession plans than their not-so-nepotistic counterparts. If those who cannot remember the past are genuinely doomed to repeat it, owners of family businesses would do well to examine the histories of companies that have been passed through the generations to understand why it is that so many second and third generation businesses fall flat on their familial backs.
The survival statistics of family-owned businesses are somewhat frightening – with an estimated 30% of businesses surviving into the second generation. If the company manages to survive the ravages of second generation ownership, it only stands a 13% chance of not being completely ruined by the third generation. What’s more, research shows that the dismal and well-documented failure of second and third generation companies have generally less to do with market downturns and macro-environmental issues, and more to do with family feuds and downright bad management by inexperienced leaders. In fact, in 2003 twenty of Turkey’s largest and most successfully family-owned companies folded – with 43% blaming fraternal feuds as the main cause of collapse.
It appears that handing over the brightly-lit and well-fuelled corporate torch to the next generation is more difficult that simply passing on the baton of a good business. In fact, it seems that the saying “the first generation starts the business, the second generation runs it, the third generation ruins it” is sadly more often the case than not when it comes to entrusting the next generation with ones business assets.
One of the key causes of failure begins with the exit of the founding member or owner, who often leaves the role of business leader, visionary, strategist, thinker and mentor vacuously and precariously unfilled. Besides for being the key strategist of the company, the founder would generally have had to take huge personal and financial risks in order to start the business in the first place. He has an inextricable emotional, financial and personal bond with the entity that is simply irreplaceable, regardless of who attempts to take his place.
Whilst much of the failure of a business to thrive in the ensuing generations can be blamed on the dispassionate children and grandchildren of the founding owner, let’s not forget that there remains a fiduciary responsibility on the owner to prepare and implement an adequate succession plan for the company – a responsibility that is in effect owed more to the employees, clients and stakeholders of the business than to his offspring, who may or may not have any desire, passion or interest in the business whatsoever.
The prospect for family feuding increases as the younger generation expands and extends to a third generation. With more children, grandchildren, in-laws and cousins to consider, the unspoken generosity of ‘there’ll always be a place for you in the business’ becomes more of a curse than a blessing – not least because it offers a ‘fallback’ option to anyone in the extended family who can’t (or has no desire to) achieve his or her own personal success in the real word. This is exacerbated by the problem that, inevitably, the business can’t grow quick enough to support everybody in the extended family who trades on the ‘fallback’ job that he assumed would be always available to him.
The result is that a once-profitable and well-run business ends up being managed by a whole brood of inter-related individuals who couldn’t find their own personal success, who aren’t necessarily qualified to perform the job which was inevitably created specifically to accommodate them and who probably have no real passion for the business at all. The inevitable tension, feuding and frustration that is bound to ensue can be further aggravated if the founding owner relies on the business for a continued income during his retirement. Over and above the family feuding and inter-generational tension, dissatisfaction by the other (qualified and loyal) employees and senior managers is bound to rear its head as nepotism demonstrates its ability to destroy what was a once viable business with a successful visionary at its helm.
Business succession planning is an immensely powerful and universal tool that can be employed by any business owner to ensure that the baton of his precious business is handed over to an amply able and impressively qualified person who shares the passion and vision of his company. Business succession planning through the generations doesn’t have to result in a messy trail of nepotistic spates, and tomorrow’s blog entitled “Passing the torch” will address the shortcomings of second generation owners and how to put mechanisms in place to ensure that ones business survives both for the family and through the family.
Whilst planning to leave ones business to the next generation is both a noble and dignified gesture, it’s not necessarily always the wisest course of action if your primary goal is to secure an ongoing source of income for the generations that follow. Understanding and implementing effective succession planning is the first and most critical step to ensuring that your business outsmarts the “shirtsleeves to shirtsleeves in just three generations” blight and that the baton of your business remains firmly in the grip of a like-minded visionary, regardless of your familial ties.
Have a blessed day!
Categories: Lifestyle Financial Planning