Family businesses account for 64 percent of U.S. gross domestic product, generate 62 percent of the country’s employment, and account for 78 percent of all new job creation.1 Yet the average life span of a family business is a mere 24 years. Less than one in three family-owned businesses survive to be passed on to a second generation, and only 13% are passed on to a third generation.
Why such a low succession rate? There are several factors that contribute to the “dying on the vine” of family businesses. Foremost is lack of communication. In many cases, a parent simply is not aware of a child’s interest in the business or is unable to convey his or her hopes for the business to the next generation.
Another factor that contributes to the death of a family business is failure to adequately plan, or lack of a formal succession plan. Nobody is immortal, yet few business owners want to give up the control they have developed over the years. It is very difficult to “let go” and allow the next generation to take over.
We have identified seven common mistakes companies make in succession planning, along with ways to avoid them.
Mistake #1 – Delaying succession planning.
Many owners of family businesses avoid the issue of succession planning until it is too late. Waiting until an owner is on the brink of retirement, suffers a health crisis, or dies puts an undue amount of pressure on the succession. It is essential to put a succession plan in place early and then make adjustments as necessary. You should be able to “flip a switch” and put your succession plan into action if called upon.
Mistake #2 – Excluding children from strategic planning.
Your children may be involved in the family business in one capacity or another. Some may even have important positions. But do they actively participate in managing the company? Or are they forced to defer to your wisdom and experience? Don’t forget, they have a bigger stake in the future of the business than you do. Bring them into the planning process from the beginning.
Mistake #3 – Withholding responsibility.
If all power in your company is centralized with you, your children will never learn the leadership and decision-making skills they will need to run the business. Make sure each child assumes a level of responsibility appropriate to their experience, and that this accountability grows as their career progresses.
Mistake #4 – Playing favorites.
One or more of your children may exhibit a desire and aptitude that exceeds their siblings. Avoid making the assumption that your other children are not interested in the business. They may expect an equal say in running the company, and an equal share in the profits. But not all children can make the same level of contribution to the business. Each should be fairly compensated for the service they provide. Another potential hurdle is a parent that can’t decide which of his or her children should be in charge. Use the succession planning process to expose your children to various facets of business management and see which of them rises to the top and is most capable of leading the company into the future.
Mistake #5 – Overlooking your spouse.
Much of the focus of a succession plan necessarily rests on the next generation. However, there are many instances where, upon the death or disability of a business owner, his or her spouse steps up and takes control of the company. So it is critical that a wife or husband be ready to assume such responsibility by preparing for it in advance. But not all spouses want to be involved in managing the company. In that case it is essential to have a trusted advisor who can step in and run the business until a buyer is found. The company’s accountant is usually the advisor most qualified to do that.
Mistake #6 – Neglecting non-family members.
Few family businesses can succeed without the participation of non-family members in management positions. Many times, the owner’s “strong right arm” is a non-related peer who shares years of experience. Such an important team member may feel threatened by the assumption of power by the younger generation. Make sure key non-family employees are involved in the succession planning process, and that they clearly understand the roles they will play when the next generation takes over.
Mistake #7 – Hanging on too long – or leaving too early.
This is among the most difficult issues to address, as it is entirely subjective. The mean age of family control in the family’s core company is 60.2 years.2 We have all heard stories about business owners who stubbornly cling to power, even though their skills and interest may have waned. This can cripple the effectiveness of the company. A less frequent – but just as damaging – problem occurs when an owner leaves the business too soon, before the children are adequately prepared to assume the leadership role. The timing of the transfer is critical.
The process of transferring a business successfully from one generation to the next can be difficult, contentious and frustrating. But it can also be a remarkably enriching experience that bonds family members in new ways. The secret is thorough and comprehensive planning, while avoiding these seven mistakes.
1 Astrachan, J.H. and Shanker, M.C. (2003), Family Businesses’ Contribution to the U.S. Economy: A Closer Look.
2 Zellweger, Nason, Nordqvist. From Longevity of Firms to Transgenerational Entrepreneurship of Families: Introducing Family Entrepreneurial Orientation. Retrieved November 2012: