Privately held and family owned businesses account for 80-90% of all businesses in the United States, contribute a large portion of GDP (gross domestic product) and also account for the lion’s share of employees. The transition of family businesses from one generation to the next is fraught with challenges.
Family owned businesses are typically very good at executing ongoing business. However, all too often they lack a clear vision and strategy for the next 10, 15 or 20 years as well as a strategy for either transitioning to the next generation or an outright sale of all or a portion of the business. Only 30% of businesses passed to the second generation survive. Third generation businesses succeed only 12% of the time and fourth and beyond only make it only 3%.
The number one reason for failure is lack of communication and trust between the generations which accounts for 60% of failures. A lack of preparedness of the next generation to take over accounts for another 25% of failure. These issues are not that difficult to address especially with the assistance of an outside advisor.
Planning for growth, diversifying the business, governance, pre-nuptials, taking tax into account, utilizing sophisticated methods for estate planning and more are the issues addressed by a comprehensive succession plan.
Succession does not necessarily mean that a founder, CEO or patriarch/matriarch will be exiting immediately. It is never too early to begin planning for succession. Working with a long lead time reduces the emotional quotient of many of the issues which need to be addressed, allows for a long-term business plan to be created, implemented and estate planning techniques to be maximized as well.
Most business owners love what they do and cannot envision anything else. They equate succession or retirement with death and/or boredom. However, succession does not have to mean exit. There are so many ways a business owner can stay involved. They may continue as the chairman of the company, perhaps run a family office, manage one division of the company, go on to create a new enterprise and many other options. Without a plan however, there is a high likelihood according to the statistics provided by many Family Business studies that the business will fail. Planning for success in succession takes time and effort.
We find many business owners are not aware of what they really spend as many expenses are run through he business. Beginning with current expenses and future illustrations for personal expenses and lifestyle for each family member provides a quantitative basis for “how much is enough”. This can help determine whether a business needs to ramp up its growth rate, consider selling outright, sell a division, sell some of their real estate or plan for some of the next generation to entertain other plans or new growth venues.
Outside consultants including attorneys, valuation experts, CPA’s, pension specialists, coaches, C-suite executives and recruiters and others may be involved over time to assist the business owner and his/her family in creating the best transition or exit for their family.