Entrepreneurs have mixed feelings about succession planning. Most want their business enterprises to outlive them but few plan for the time when they will no longer own, manage and lead their business. Owners enjoy running their businesses, derive personal satisfaction and self-esteem from their work and then seldom are willing to relinquish their position of leadership and control.
Fewer than 30 percent of family businesses survive the transition from the first to the second generation. Fewer than 13 percent survive into the third generation, and fewer than 2 percent survive to the fourth generation. Failure to plan an orderly succession process endangers the heart of the American free enterprise system - the family-owned business.
Many of these failures could be averted by careful planning. The key elements of succession are: Strategic plan for the business; The establishment of guidelines to regulate family participation in the business, ownership, continuity and leadership; The utilization of good advisors; A development plan for potential successors; A sound personal financial and estate plan, and a resolve to perpetuate the family business. In order to carry out the resolve to perpetuate the business, the owner must be committed to family succession. Potential successors, consequently, must be identified early, must be well-trained, and must be offered opportunities to have roles of increasing responsibility in the business. Successors must be trusted by the owner and must have their capabilities fairly and regularly evaluated. They must possess the requisite knowledge, motivation, experience and talents to lead the company.
A business plan must be committed to paper - it must be a written guide for the owner, managers and associates. Capital requirements must be spelled out and a critical analysis of your internal and marketplace strengths and weaknesses must be performed. Without such an analysis, the strategic plan will be hollow and useless.
Guidelines for family participation must be communicated to family and associates. There is no value in keeping this secret; furthermore the existence of clear guidelines will help family and key associates plan for their futures as well as ensure the continued loyalty and commitment of non-family associates.
Use good advisors during the succession process. Their counsel can be invaluable. Share information with them; take them into your confidences. Good advisors should be knowledgeable about your business, committed to helping you over the long haul, understand your wishes about the business and succession, be sensitive to your feelings, possess good communication skills, have personal integrity, be convinced that their assistance will help you and the business, and be courageous enough to offer you clear and unambiguous advice as well as be able to defend the reasoning behind their advice.
Succession planning is an arduous emotional process for the entrepreneur and his or her family. He or she must be able to involve family members in numerous succession decisions. The owner needs to be able to "let go," to accept the advice of others, and to support the work of the designated successor. The owner also must find other challenges or interests for the time and energy that heretofore had been dedicated to running the business. Finally, for a successful leadership transition to occur, a date for the transfer of power must be selected, publicly announced and met.
Successful succession planning requires courage, patience, and ability to face one's mortality as well as a willingness to collaborate with others. Entrepreneurs who successfully make this transition possess the following characteristics: They have a plan; -They communicate it; They adhere to it; They utilize the counsel of advisors, key employees, board of directors and family; They enjoy a measure of financial security; They are in good health; and they have interests and involvements that are independent of the business.
Solving the succession puzzle and passing the leadership and ownership of the family enterprise on to the next generation is the most critical challenge facing business owners. Careful and thoughtful planning is the only effective means owners have for ensuring that they, rather than the IRS and the courts, will shape the future of the businesses they have worked so hard to create and nourish during their lifetime.