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Building and Implementing a Succession Plan for Family Businesses

By Pavlo Phitidis

Building a family business, and passing it down as both a legacy and an asset, is seldom achieved. A mere 30% of family businesses passed on to the next generation survive, and only 12% making it to the second generation. A tiny 3% survive to the third. This week, on The Money Show with Bruce Whitfield, we outlined the ways succession plans go wrong, and how you can ensure your family business enjoys not only longevity, but long-term success too:

The cost of succession failures

Businesses take time to grow and, just as wealth is cumulative, so is momentum. Losing the momentum put into a business, over time, isn’t the only cost attached to a succession failure. Families stand to lose their wealth base, while staff may lose their jobs. It can also affect tax contributions and leave a gap in a sector that was once well-served by a growing business. 

What Goes Wrong? 

There could be multiple reasons behind the failure of a family business, but many of these are rooted in the development of the business whilst under the care of the first generation, or come to light as the business is handed down to the succeeding generations:

  1. Different Risk Horizons and Value Sets: While the first generation built their business in a way that was relevant to their environment, the second generation will be operating it in a completely different environment. Similarly, the succeeding generation will assess risk in an entirely different way to the first, which could lead to tension during the handover process. 
  2. Dysfunctional family circumstances – Children may feel antagonistic towards their parents, because they felt somewhat neglected during the development of the business. This can lead to a breakdown in communication, which then leads to an ineffective transfer of the business. Moreover, this could lead to important skills not being transferred from the first generation, to the next, with dire results. 
  3. Assumption – Children may assume that they’ll naturally take over the family business, while parents may similarly assume that their children are willing to head up the company. Assumption can, however, lead to dissent. Managing or playing a part in the family business should be earned, not automatically awarded. 

How to Get It Right

While family businesses are often viewed as part of a legacy, that should not obscure the goal of a developing business – to build an asset of value. Whether that becomes a thriving business that’s handed down through generations, or is sold to ensure that your family can enjoy the financial benefits from the sale, is immaterial. Here’s how to create a succession plan that works for your family business: 

  1. Set a common vision – when the succeeding generation joins the business, it’s time to rebuild it, from the ground up, and create a shared vision with common goals. 
  2. Rebuild the business through a structured programme - through this, you can accommodate and build for a changing business environment, and create a structured growth plan that highlights the interdependence of each aspect of your business. Let the successors implement that plan along with the staff in the business to further bridge those relationships too. This plan should be built from the customer back to the operations and not the other way round. As you are changing in the business, so too has the customer landscape!
  3. Run a monthly mini-board – As Lawrence in Cape Town suggested, removing emotions from the family business conversations is difficult, but essential. Formalizing how you communicate with each other within the business, and setting aside dedicated time to have those tough conversations, will help to ensure that transferring skills to the younger generation takes place correctly. 
  4. Include your staff in this rebuilding process – integrating staff into the succession plan, and ensuring that they too understand the re-developed and re-engineered vision and objectives, can help to assure a successful transition. 
  5. Hire a Mediator – family dynamics or conflict can flare up, and securing an objective mediator to guide you through the succession process, is important. 

An asset of value can be successfully transferred to the next generation, or it can be harvested through a sale, if the succeeding generation isn’t interested in continuing their career through the family business. Let Aurik help you build your family business into an asset of value.

Tags: Asset of Value, Family Business, Succession, Next Generation, Business Exit

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