A 2012 study concluded that about half of family business owners intend to pass the company on to the next generation.1 If you have yet to navigate the often choppy waters of transitioning the business to your heirs, or if you are about to embark on that journey, here are some of the potential pitfalls in that process.
A Slippery Slope
Family business experts found that only about one in three companies successfully execute an inter-generational business transition, 2 with the leading causes of failure attributable to:
1. Breakdown of communication and trust within the family unit: 60%
2. Inadequately prepared heirs: 25%
3. Absence of a clear vision or mission to align family members: 12%
4. Failure by advisors to properly address taxation, governance and wealth preservation issues: less than 3%
Pathways to Success
With success riding largely on a family’s ability to communicate and to clearly articulate a plan for the future, the following guidelines may help to ease the business transition process.
Start planning early.
Get the process started years before the actual transition occurs. Some experts recommend building an exit/transition strategy into the initial business plan. As part of the planning process, business owners should create:
- Supporting structures, such as a family constitution and business bylaws to familiarize all parties with the rules of governance. Fewer surprises mean fewer conflicts and discord down the road.
- A clear vision for the business that involves all family members, whether or not they are active in running the business. Visioning is an effective method of allowing all stakeholders to share their personal goals for the business, which in turn helps create buy-in and minimize future conflicts.
Prepare the next generation.
Identify the skills and leadership qualities the business may need in the future, and then prepare young family members to fulfill those roles. This will likely require sharing knowledge and providing educational opportunities.
Manage conflicting priorities.
It is not uncommon for younger and older generations to have differing, and conflicting, priorities for the business.
- Senior leaders may have concerns about whether the younger generation “has what it takes” to successfully run the business; anxiety about the next chapter of their lives (retirement, staying involved in some capacity); or worries about all children, including those not involved in the business, receiving a fair share of the family wealth.
- Members of the younger generation may be anxious “making their mark” on the business by taking it in a new direction; investing in new technologies or processes that may improve the business but require a significant capital outlay; and micromanaging by an owner remaining involved in day-to-day operations.
It is important that families express their concerns openly, and it may help to engage a professional facilitator. When all parties feel they are being heard and respected, the sense of commitment to the business – and the transition process – is strengthened.
1Price Waterhouse Coopers, “Choosing your next big bet,” PwC Family Business Survey, A U.S. perspective, 2012/11.
2Abbot Downing, a Wells Fargo business, “Preparing for Family Business Transitions,” 2012.
Contact Ivie and his team at www.morganstanleyfa.com/
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