Family Businesses Should Plan Now for Succession Later
The more than 10 million family-owned businesses in America are a major economic force, paying an estimated 65% of all wages and accounting for 50% of the gross national product.
One of the greatest challenges they face is succession--who will lead them into the next century. Statistics show that fewer than 30% of all family businesses make it to the second generation and only 13% to the third generation.
The Times talked with Dr. Craig E. Aronoff, founder and director of the Family Enterprise Center at Kennesaw State University in Marietta, Ga., and chief executive of Family Business Consulting Group. He is also executive editor of the Family Business Advisor newsletter, a joint venture with the Arthur Andersen Center for Family Business.
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Q: Why worry about succession?
A: Taking the attitude “When I die my heirs will just have to take care of the problem” is a very dangerous approach. The heirs may or may not be prepared to run the business and are likely to have different ideas about what should be done with the assets and therefore a conflict is likely.
Businesses are tenuous things. If your family is out squabbling about what is going to be done with this asset, the business is going to suffer.
What’s more important than selecting a successor, however, is understanding the process by which one will be selected. There needs to be an understanding about how the family is going to decide what to do with this asset. If you care about your family and you have been working hard all your life to provide for them through this business, then you need to pay some attention to what is going to happen after you’re gone.
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Q: Does “succession” refer strictly to when a business owner dies, or can it also apply to retirement of the older generation?
A: One would hope that there are clear plans for succession and that those plans would not hinge on someone’s death, particularly if there is incapacity before death. In that case, the business is likely to be injured by the declining abilities of the person who is running it. We would hope that there would be an enjoyable period of retirement too. However, people who found businesses sometimes don’t want to retire. A recent study [Arthur Andersen’s American Family Business Survey] suggests that between a quarter and a third of leaders of family businesses either don’t intend to retire or plan to remain involved in some capacity in the business throughout their lives. That [heightens] the need for succession planning.
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Q: Why?
A: There are several challenges that confront a family business at the time of generational succession. One is financial--how to support the elder generations in retirement; how to sustain enough funds to continue to run the business; the need for one or more children in the business to be able to take enough money out of the business to support their lifestyles; and the need to plan for estate taxes.
Another challenge is strategic or managerial: What’s worked for the last generation probably won’t work for the next generation. The world has changed; the market has changed; there’s new competition; and there is a need to develop new strategies. The older generation very likely wants to continue doing what they’ve been doing. The younger generation will want to do things new ways and there are going to be extreme conflicts about the direction of the business.
In that scenario, strategic planning should include being clear about who has what role and who can make what decisions. It takes a lot of planning, a lot of sensitive desire to make this work across generations.
The final challenge is family. All that’s happening in the business is probably having intense emotional echoes in the family, particularly if several members are being considered for leadership.
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Q: Does it make a difference if you’re talking about a large or small business?
A: Probably not. We find the issues depend on how many generations the business has been in a family. With more stockholders and more cousins involved instead of just the nuclear family, the issues are different.
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Q: What’s the first step to succession planning?
A: To understand the goals and objectives of all the members of the family. The founder and spouse need to sit down and ask, “What are our hopes and dreams relative to the business?” And then they need to have a discussion with their children and perhaps any non-family executives about their goals and aspirations. What do they hope the future will look like? To what extent can they envision a future that they are all excited about and what are some ways to get there?
Then you ask the question, “How do we achieve our goals?” The answer can take many forms. A child might need a broader education to successfully direct a business given new competition, or a child may need experience in another business setting.
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Q: What’s next?
A: I don’t think you can quantify it. Successful succession planning is recognition of the challenges that confront you on the way to your goals and dreams.
As soon as you start talking about succession planning, you start talking about everything else: financial planning, estate planning, development of your children as potential leaders of your business, what the business is going to look like in the future. Succession planning is a nice way to begin looking at all the issues.
What makes a successful business across generations is having a strong business and having a strong family. Our research shows that if you don’t have those, you can do all the succession planning you want and it’s not going to help you.
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Q: What are the pitfalls in succession planning?
A: Not communicating. For example: Dad says, “This is what I want to happen,” without saying, “Let me talk to the rest of the family and see what they want to do.” Or Dad makes assumptions about what his kids are supposed to be doing or what they want without asking them.
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Q: Does your age make a difference when you are talking about succession?
A: For family businesses it’s really a lifelong process. When your kids are young, they’re going to get a taste of what you do and how you do it. How you talk about your job around the dinner table is an important factor. If you’re able to share your excitement, your satisfactions, your fulfillments that come from your work, your children naturally are going to be more excited about it.
When your kids first enter your business, you need to be thinking and talking about what the future may be like. It’s usually inappropriate to say, “This business will be yours. You will lead it someday. You will own it someday.” It’s much better to talk about that in terms of what the opportunities are and give your children some freedom in terms of whether or not they choose to join the business.
When you’re 45 and your kids are 20 is a great time to start talking about it. By the time you are 55, it’s real serious, and if your kids have been in the business for 10 years, they are probably chomping at the bit for more responsibility. And if you’re 65, you had better have some clear plans for succession.
At any point, a CEO should have contingency plans. They should be clear and written out, even if it’s just a sealed letter that’s to be opened “on my death or incapacity.” And it should be updated once a year. It should include things like where the keys are, who the accountant is, bank account numbers and names of key employees.
Resources for Family Businesses
* Your accountant, banker, financial planner or life insurance agent can help.
* A good starting point: About 100 colleges and universities have family business programs, including USC’s Family and Closely Held Business Program, (213) 740-0416; the University of San Diego, (619) 260-2376; and Cal State Fullerton, (714) 278-4182.
* The Family Firm Institute of Brookline, Mass., a professional membership organization, has a free booklet of consultants, accountants, lawyers and educators. Call (617) 738-1591, or visit its Web site at https://www.ffi.org.
* Business Owner Resources provides information and help, including booklets, newsletters and pamphlets on a variety of topics. Write P.O. Box 4356, Marietta, GA 30061-4356, call (800) 551-0633 or visit its Web site at https://members.aol.com/busownres/bor.htm
* Family Business Advisor is a newsletter by Craig Aronoff and John L. Ward, published in cooperation with Arthur Andersen Center for Family Business; for subscription information, call (800) 551-0633.
* MassMutual, the Blue Chip Co., is a Springfield, Mass.-based life insurance company that offers studies, booklets and CD-ROM titles. Call (413) 788-8411, or visit https://www.MassMutual.com/
* Arthur Andersen Center for Family Business offers a variety of information, from trends and directions to publications and sources of advice. Call (800) 924-2770 or visit https://www.arthurandersen.com/cfb
* “Wars of Succession: The Blessings, Curses and Lessons that Family-Owned Firms Offer Anyone in Business,” by Roger Fritz, Merritt Publishing, $17.95, (800) 638-7597.
* Check out NetMarquee Family Business NetCenter on the Web for excerpts from a variety of sources (https://nmq.com).
* Pacific Bell’s Smart Resources Center offers small-business success brochures. Call (800) 848-8000.
