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Article by Steve Hancox, published in The Cincinnati
Business Courier, Vol. 15, No. 44, |
Is Success in Your Succession Plan? If you are an entrepreneur considering passing the business on to the next generation, consider this - less than 30% of privately held companies successfully pass from one generation to the next. That's right, more than 70% of all companies that attempt to maintain family control either fail or sell out. Why you ask? After all, you are giving the next generation a thriving business, complete with customers, business processes, employees and maybe even cash. How could they fail at a rate that is almost as bad as it is for companies just starting up. The complete answer is somewhat complicated and varies for each business. However, stated simply, the next generation's task of running the business is much more difficult than you might think. There are many reasons for this; the following are just a few. First, the business is more complicated than when it was founded. It is not the level of sales that determines how complicated a business is, it is the number of employees. The real challenges come from dealing with people fairly and consistently and managing them productively. Unlike the current owner, the succession manager has to cut his/her teeth in an environment with more, possibly many, employees. The second challenge can be even more daunting. Small business owners tend to think of their business as the combination of two worlds: family and business. This simple model, of two intersecting circles, represents the owner's view of the separate but overlapping worlds of business and family. In many ways, this model can be useful in describing how entrepreneurs manage to have their often conflicting worlds of business and family coexist. However, this model may not be useful in describing the business in the second or third generation. The model fails because the business element is actually comprised of two separate pieces: management and ownership. Graphically, it changes the simple model to incorporate a third ring. During the founder's reign, management and ownership are indistinguishable, as the founder fills both roles. However, for businesses in the second generation and beyond, this is not necessarily true. The separation of management from ownership affects control and is probably the single most important concept of succession planning. It can occur when the owner has more than one child and wants to be equally generous with each, or when the founder retains a certain level of ownership for financial security during retirement. These are the two fundamental reasons that account for the very high failure rate of businesses transitioning from one generation to the next. There are many other factors working against the succession manager or management team, but they are often related to these two. Communication is probably the greatest challenge. For the owner, it is communicating the vision and priorities to the next generation and knowing that he/she has been heard and understood. For the next generation, it is communicating among the siblings in a way that builds confidence, understanding and teamwork. Money is also an issue. How should the owner's retirement be funded? Should he/she be paid a lump sum for his/her shares, or would this communicate a lack of confidence in the chosen successor? How will the siblings resolve their varied and changing desires for dividends, and how will the needs of the company be balanced? All of these and many more factors place a tremendous challenge on the succession manager/management team. How have their skills been developed? Arguably, they need to be better managers and leaders than the current owner. From whom have they learned? Are they properly prepared for the challenge? Will the business suffer as a result? Or worse, could these challenges destroy the family relationship? Succession planning is often confused with estate planning. Estate planning is primarily concerned with the distribution of wealth and the minimization of taxes. Unfortunately, some businesses prepare a careful estate plan and simply add to that the naming of a successor. Succession planning is more than that. It should be about planning the ongoing success of the business. Succession planning starts with estate planning, but it should not end there. Assess your family's ability to communicate and their ability to understand and manage the business. If there are shortcomings, get help. Just as your succession planning team should include an attorney and your accountant, you might also seek the services of a management consultant specializing in family business management development. Don't put off succession planning. With ample time and an experienced and complete team, you should be able to identify, articulate and meet all of your succession planning objectives. The keys are 1) address it early, 2) use a disciplined structure to identify the issues and 3) get capable, professional help to guide you. Success will not come easily, it never does; but with careful planing, a good management team, and the needs of the owners understood and provided for, the company you started could make a world of difference for many generations to come. |
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