...Absolutely, because the odds are against you!

Family business leaders often neglect the issue of succession in their family businesses, particularly if they are entrepreneurial founders. But to do so is to neglect the long-term survival of their business and increase the odds for its failure. For problems of succession are indeed the greatest threats to the survival of family businesses. Market shifts, product liability lawsuits, credit crunches, supply chain disruptions, information system failures—none of these can compare to the threat of failing to plan for the transfer of family business ownership and leadership to the next generation.

Some 75% of successful family businesses fail to survive through the second generation. Far fewer survive into the third. Why? The most common reason is that the goals and objectives of the founding generation are rarely the same as those of the succeeding generation. The next generation brings with it new dynamics, such as an increasing number of family members who can lay claims to the business.

A careful planning process for ownership, leadership, and management in the business succession process will address these and many other related issues. To ignore such concerns is simply a fundamental failure to plan for success. Seen differently, failing to plan for succession implies planning to fail.

Comprehensive planning for succession

Good succession planning does not merely involve designating a family member as the next chief executive and training him or her for the job. Rather, it involves a long-term, continuous effort to balance often competing interests and pressures that are integral to a family business. These interests and pressures include not only the family members who are directly involved in running the day-to-day business, but also non-family managers and family members who do not work in the business.

A successful planning process must be broad rather than narrow. It should be a comprehensive and ongoing effort to define salient issues in the family business and identify a range of options for each issue. It should also attempt to force submerged issues out into the open. These often include conflicts between parents, children, children's spouses, and other family members over family business goals and how these goals relate to personal hopes and interests.

Experience has repeatedly shown that successful planning efforts focus on the process of planning itself rather than on any particular outcome. The establishment of an ongoing planning process encourages participants to clarify their often hazy goals to themselves. This clarification of goals allows for further thought, discussion, and eventual decisions that are more clearly understood by the participants.

How best to start the planning process

Succession planning in family businesses often begins in response to an external event such as illness, accident, death, marriage, or divorce. Ideally, planning should not begin as a reaction to a single event. It is very unlikely that good succession planning can proceed, for example, during a major health emergency of the business leader or the period of mourning following the death of a family member. Instead, leading family members should acknowledge the integral importance of succession planning to the ongoing health of the business, the relations of family members to the business, and the relations of family members to each other.

It is useful early in the planning process to have family members participate in short education and training sessions devoted to family business planning. Even a few brief training exercises can help highlight the major issues of succession planning and convince the participants that theirs is hardly a unique situation. This realization can open the minds of many to considering solutions that have been successful for other family businesses.

As the planning process unfolds, it is important to keep all family members informed about recent decisions, current issues, and future concerns. Regular updates, such as a quarterly planning memo, can directly communicate important information to all involved. An old axiom applies here—better solutions develop from better communications.

Most families comprising more than a few people will have some members who take active roles in the business while others remain passive. The respective obligations and rewards for such members should be explicitly defined. Such definitions should not be dictated by the current business leader, but should rather emerge over time through ongoing discussions among family members.

A key feature of many successful planning processes is the use of a third party advisor to guide the family through the many intricacies of succession planning. An experienced family business planning advisor will be able to interview all the key players in the business and the family. In facilitating the planning process, the advisor can help identify the relevant issues, including the more hidden ones, while avoiding much of the interference that emerges from normal family emotions. The independent judgment of the advisor can serve as a means to consider alternatives, resolve conflict, and overcome opposition. The advisor should bring to the table valuable experience obtained from working with effective practices that have guided other successful family businesses over the generational bridge.

Addressing the needs of family members, managers, and owners

Major issues that the family must ultimately resolve include such technical concerns as legal structures, share ownership arrangements, estate planning, inheritance tax provisions, management succession, and compensation. But the family should ideally address these specific concerns only after having resolved many of the more important general and emotional facets that are always present. Together, these pose a hidden dimension that is more difficult to define and sort through than technical issues. It can present countless potential issues, a few of which might include: motivation and competence in the next generation, control during management transition, fair compensation to various children, potential sibling conflicts (including sibling spouses), fear of family obligations, historical lack of commitment to promises, fundamental differences in interests and personalities, etc., etc., ….

Only after family members address their major concealed issues should they move on to resolving the technical ones. The technical matters need to be defined in some detail in order to avoid misunderstandings and a future unravelling of settled points. For example, compensation plans should distinguish between passive and active shareholders, family and external board members, family and outside managers, family and non-family shareholders, etc. Furthermore, the compensation plan should specify principles and some details of bonus systems, stock option plans, potential "A" and "B" shares, straight salaries, etc. A policy for periodic "tree trimming" of more distant or inactive family members can be useful to prevent geometrically increasing claims on the business assets. Other specific provisions might include methods of creating liquidity for children, the need for non-family directors, a specification of the appropriate roles for family and non-family directors, and methods for conserving capital in the business.

Finally, the rules should also include rules for changing rules, as well as for designating a third party as a "process arbitrator" to help in the case of unresolved disagreements. Just as planning for succession is an ongoing process, a family protocol or business constitution should be regarded as a living document that should periodically be revised.

As a family business leader, you start out with the odds against you in transferring a successful business into the next generation. If you make a concerted effort to plan for succession, you will reduce these daunting odds. And if you start the succession planning process early, make effective use of an experienced and reputable advisor, and integrate the process into a normal, ongoing part of your business, you will considerably improve your chances for achieving a successful generational transition.

The choice is yours. In practical terms, a failure to plan for succession is simply a plan for failure.

This article appeared on the www.ibizresources.com website.