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Keeping It Relative: Succession Planning for Family Businesses

Dec 11, 2012

Family-owned businesses come with an extra set of challenges, particularly when it's time to pass the reins to a new generation. That's why effective succession planning is crucial for any family-run business.

Many family business leaders are put in a difficult spot when there isn't a single, capable individual waiting in the wings to take over. There may be pressure from other parts of the family to leave certain aspects of the business in the hands of relatives who are either not suited for the position or simply not the best candidate, which can spawn resentment on one hand or less-than-optimal leadership on the other.

Remember that while many of your family members may be intelligent, experienced and skilled - and therefore well suited to fill important jobs within the company - not everyone has the temperament to lead a business.

Difficulties in transitioning a business from one generation to the next are not uncommon. According a recent study from the Family Institute at Northwestern University, only 30 percent of American family businesses stay in the family from the first generation to the second, often due to difficult transition issues. The institute concluded that for the transfer of power to be a success, the current leader of the business needs to engage in careful planning of emotional factors as well as business concerns.

Some issues to consider when transitioning management positions to members of the family include:

  • Are all your family candidates for leadership roles respected and admired by non-family senior management in the company? If not, find out why.
  • Be honest in your evaluation. Are your children or grandchildren really interested in running the business after you've retired or passed away? If they are not, most business leaders would agree that it's simply better to sell the business upon retirement or death than leave it to unwilling heirs.
  • Are you distributing assets and responsibilities fairly? While you may divide business ownership equally among your relatives, chances are, the distribution of responsibility will not be equal. Is it fair to divide the assets evenly when one person is dedicated to hard work in the company and another seldom darkens the door of the building?
  • Do not underestimate the potential of the transition to breed or exacerbate trouble within a family. Siblings may become one another's supervisors, elevating sibling rivalry to a new level. Personal grudges may extend into the boardroom and parent-child relationships that are less than harmonious could flare up and affect the business.
  • Children are more likely to run the business successfully if they've worked in it, even part-time as teenagers. It becomes less about family duty and more about wanting something they've invested effort in to succeed.
  • It's also critical, however, for the heirs of a family business to gain some experience in "the real world," such as a job environment outside of the family's influence. While your child or grandchild may know your business inside out, your company doesn't operate in a vacuum, and it's important for your successors to understand how their company relates to the business world as a whole and be able to form relationships with partners and suppliers.

While most family-owned business leaders would like to imagine themselves handling the succession to its ideal conclusion, it's important to remember that this isn't always the case. Death or illness can leave a family company vulnerable, so it's important to have a good plan on paper.

Entrepreneur recommends that family business leaders draw up a documented plan and timetable of succession planning for key positions in the event of death, divorce or unresolvable family conflict. This includes considering whether a buy-sell agreement, or a legal contract that pre-arranges the sale of a company between an heir and a willing buyer, is necessary.

In the end, there are many issues to consider in succession planning that may not be fun to think about, i.e. "How long will I live? "Are my relatives capable enough?" "Do they want my business after I'm gone?" and "Is my spouse trustworthy?" Ignoring these questions, however, can be much costlier for the long-term future of your firm.