Why Your Family Business Needs a Succession Plan

Succession is not the end.

Many business owners love what they do and cannot imagine a life without their enterprise intricately involved in their day to day cadence. Family businesses comprise two-thirds of global businesses, account for 70-90% of GDP, 50-80% of jobs, and 85% of start-ups are funded by family enterprises according to the Conway Center for Family Business. So family-owned businesses play a huge role in the fabric of our economies.

Almost 60% of all businesses have CEOs over the age of 55 and one-third are over 65. Surveys state that 51% expect to retire or hand over control over the next decade. About half expect to sell to a third party while half expect the next generation, employees or management, to succeed them.

In 2017, 40.3% of family business owners expect to retire or transition over the next few years, yet less than half have selected a successor. Estimates are that 43% have no succession plan in place. Approximately 70% would like the next generation to take over but they have no formal plan in place. All too often, not wanting to discuss mortality, fear of boredom after retiring and anxiety over familial issues are reasons for procrastination. (For related from this author, see: Successful Succession Plans Depend on Your Team.)

Shirt Sleeves to Shirt Sleeves

This is the proverb describing what happens to many family enterprises. In Japan, the expression goes “Rice paddies to rice paddies in three generations.” And the Scottish say, “The father buys, the son builds, the grandchild sells and his son begs.” So the issue of generational success is global.

Only 30% of businesses survive into the second generation and 12% into the third while 3% make it to the third and beyond. The founder often comes from a life of hardship and is determined to make something better for themselves and their family. They begin by rolling up their shirt sleeves and working hard to build an enterprise. The next generation typically is more educated, has grown up watching their parents work hard and while they now live more comfortably, they remember the struggle. This generation often introduces new markets, products or technology to the business and helps it grow. Very often the founder is still an active participant in the business. But this is where things go awry and there are many reasons for it. (For related reading from this author, see: Keep the Family Business Going With a Succession Plan.)

The third generation has no memory of hard work or struggle as they grew up affluent. All too often, this generation either lives a lavish lifestyle or attempts new ideas without risk management and squanders the wealth.

Studies show that the reasons for failure are concentrated. The number one reason for failure is lack of communication and trust. That factor alone accounts for 60% of failures according to research by Williams and Preisser in 2003. The same study states that another 25% of failures result from a lack of preparedness for the next generation to assume control. All the myriad other reasons such as poor planning, lack of good legal, tax or financial advice, etc. account for just 15% of failures. It would behoove any family to create a structure where communication and trust is developed and training takes place to allow the future leaders to be prepared.

An outside advisor can orchestrate the plan to help the current leaders communicate what they would like to have happen and implement structure to prepare the next generation for success. This is a process, and the earlier the business owner begins the easier it will be to address the necessary protocols and steps to help secure the family business. (For more from this author, see: Prenuptial Agreements and Family Businesses.)

This article was originally published at Investopedia.com.