Did you know that family-owned firms account for 66% of global businesses and 30% of billion-dollar companies around the world, yet only 16% of them have succession plans? In the U.S. alone, family firms comprise 80%-90% of all business enterprises, generating 64% of the GNP and employing 62% of the workforce. Clearly, family firms are incredibly important to the economy, which is why the issue of succession should be approached thoughtfully and intentionally to ensure the ongoing health of these businesses.
This issue is only going to grow in importance. Mass Mutual predicts that in 2017 alone, 40% of family business owners expect to retire, creating a massive transition of ownership in the U.S. But typically, only 30% of family businesses make it to the second generation, just 12% survive to the third generation, and a mere 1% are still operating in the fifth generation.
Yet, more and more, as I travel around the country conducting family firm workshops, I realize how important a solid succession plan is, both to families and to firms.
As a corporate anthropologist, a culture change expert and a daughter raised in a family business, I have a particularly strong interest in helping family firms successfully prepare for their succession.
If you're starting to think about the future of your family business, consider these six steps as you prepare to hand over the reins to the next generation.
Step 1: Start the process early and enlist an outside voice
Very few leaders of family firms want to think about succession for many reasons, including their own mortality, the chance that they’ll alienate a son or a daughter (or both), or the ultimate challenge of making hard decisions for the company’s future.
But planning the succession long before you need to will be one of the most prudent moves you make for your business.
Given the enormity of the task and the many decisions you need to make daily to keep your current business running, I strongly suggest hiring an experienced external “succession coach” who can help with the process.
Make sure that this adviser is an enabling facilitator of the process and not the “decision-maker.” Yes, it is hard for family members to accept the recommendations of a third party, but it's harder still to hear them from a father or mother.
Step 2: Get all stakeholders involved in forming the future plan
While the ownership portion of the plan is usually top of mind, that alone won’t pave the way to a better tomorrow. A future-focused, well-developed business plan is what will enable the next generation to grow the company effectively for decades to come.
Both generations should develop this plan together, and they should agree on the best ways to grow both the company and the family’s wealth. If you’re unsure of the skills or seriousness of your children or other family members to properly manage the company you built, this will become clearer during this planning phase.
Step 3: Which son or daughter, niece or nephew, is the right one to lead?
Your selection process needs a process, because it's about the business, not the position someone occupies within the family. Step outside your family relationships and really look at how the possible candidates approach big-picture issues, change situations and management challenges. If no family member is truly cut out to be CEO, look outside the company.
Step 4: Culture change considerations
Company culture can play a huge role in the succession decision, both in terms of whom to promote from the family or whether to recruit an external CEO. Determine what your culture is now and how it works, and what it should be in the future. Make sure the firm's next leader has a good grasp of this.
Step 5: Outline and reaffirm the plan, repeatedly
Even when succession plans are carefully considered and drafted, they can be misconstrued. Sometimes sons and daughters only hear what they want to hear. Or they assume something will be different when their father or mother retires. So keep in mind that the intergenerational disconnect in family business communication can be enormous.
Case in point: Research from the Canadian Federation of Independent Business (CFIB) has shown that 74% of the senior leaders of a family business claimed to have a clearly communicated succession plan, but 78% of their successors reported that no plan existed!
Step 6: Develop what your new role will be long before you exit
Start working “on” the business instead of “in” the business, looking for other ways to be of value. Map out a plan to hand over some leadership functions. Also, create a special advisory board where you can be involved in policy but not the day-to-day activities.
Entrepreneurs often have the hardest time with this. Moving into new roles is difficult for them, when their entire lives are focused on being creative rainmakers with new ideas that turned into innovations.
No matter how well you plan, change is never easy.
Inevitably, one day you will leave the business you worked so hard to build. That's why the sooner you can develop a strong successful plan for the future, the better off your company will be, now and for years to come.