The ability to carry on a successful intergenerational transfer of ownership and leadership is one of the most important and difficult issues facing a family business. One metaphor for succession is the firefly. They flicker brightly for a period of time, then fade away. Consultants call this the rule of thirds: only about a third of family businesses make it to the second generation. A third of those survive to see a third generation and only three percent of those manage to see the fourth generation. Research indicates that failing to transfer the family business can be traced to one major factor: lack of planning. A recent survey (1,952 families) indicated that 66% had no succession plan or had a ” loose plan” that was rarely executed.
Succession planning can be especially complicated because of the relationships and intense emotions usually involved. Most people are not comfortable discussing issues such as aging, death, and their financial affairs,all of which are involved in the discussion of succession. Realistically, it takes years to plan and implement a proper succession plan. A good plan typically covers three main topics: management, ownership, and financial matters. It is important to recognize the distinction between management and ownership. They are not necessarily the same thing.
Often, the most challenging part of the succession process is getting started. First, you should thoughtfully and realistically assess the situation, and determine your objectives. Then, methodically address each issue that may stand in the way of those objectives. Seek input and help from advisers, independent directors and family members.
Succession of a family business is inevitable and the earlier you start planning, the more effective your transition will be.