As we are planning for our family Thanksgiving I can’t help but think about the family businesses I have worked with over the years and about the changing landscape of family owned businesses. On Thanksgiving the tradition in many homes is for dad to have the honor and privilege of slicing the holiday turkey. It’s a tradition that is often difficult for dad to transition to other family members. If it’s tough for him to pass the torch on carving the turkey, think how difficult it would be for him to transition his family business.
Passing the family business to sons and daughters is not unusual and today more and more business owners are reaching the stage where they ready for transition. Unfortunately, the number of family managed businesses that survive, let alone prospers over several generations of family management, is rare.
Generally, the stronger the founder’s position in the company, the poorer the succession process. Giving up control of a business, no matter how sensible, is no small feat. Even the owners who are wise enough to address tax and estate planning issues can neglect critical operational planning needs. By doing so, they set the stage for a level of turmoil that could cause the company to fail during or after its transition.
I have seen a number of family business situations where second generation owners struggled to keep the business alive. The founders and their advisors did a superb job of preparing comprehensive tax and estate plans, but the owners neglected to develop a basic operating succession plan. In other words, there was a will [the legal aspects of succession], but no accompanying way [the operating aspects of succession].
Creating successful operating succession can be a long and difficult process. It’s usually hard on the family, as well as on employees working in the business. It can be especially uncomfortable for a strong, successful founder. It often takes years of planning and practice. It also demands at least the same attention as that given to tax and estate planning. Without an operating succession plan, all of the effort, time, and money spent by the owner on financial or estate planning can’t save it from operating ineptness.
Where multiple family members will be involved in the new organization, operational succession planning becomes even more critical. This is especially true when second generation owners are close in age and abilities, or when they both covet the top spot in the company. When the first generation leader is removed, unresolved tensions and conflicts typically increase over time, with internal strife and power struggles escalating to the detriment of the business.
It’s never too early for a business owner to begin all aspects of succession planning. Legal, estate and tax issues must be addressed to avoid potential financial disasters. Operating succession planning must also be addressed to begin developing the next generation of leadership. Of course, simply preparing an operating succession plan is not enough. As with any planning process, the plan needs to be implemented. Successful implementation of operating succession plans requires commitment and discipline.
The new leaders must be given the opportunity to gain the experience necessary to run the business. They need to be included in increasingly high levels of decision making. They also need to understand the heartbeat of the company, and its unique competitive advantage in the marketplace. They need to gain the trust and respect of fellow employees who are outside of the family. Most of all, they need to understand the vision of the founder so they can continue to lead the company successfully into the future.
CKS Advisors specializes in the operational planning needs of family businesses, and supplements the owner’s team of tax, estate, and investment experts, and thus can be a powerful facilitator in dealing with uncomfortable issues that may impede success.
As the leadership of family businesses change in the coming years, having a Will as well as a Way may spell the difference between a business being a statistic of failure, or a powerfully inspiring success story that spans the generations of a proud family.
– Joel Strom, Managing Partner