Transferring a Family Owned Business (FOB) to a new generation is hard! Even though
most owners hope to have their children own and run the business, the high rate of
failure – more than 70% - leaves many families in turmoil.
But what does “failure” mean? After all, transferring the ownership and responsibilities
of a business seems pretty straight forward with a legal transfer completed in just a few
The initial transfer of the FOB is not the problem. The problems come after the fact.
Here, “failure” is determined when the receiving or successor generation “involuntarily
loses control of the family owned business.”
Note the highlighted text: the successor is free to sell the business or even give it away.
As long as these are done voluntarily, the transfer has not failed.
But when the successor is forced to sell the business, or if the business is involuntarily
lost through bankruptcy or insolvency, the succession has failed.
Family members have different opinions about topics like investments, dividend
payouts, family members working in the business, or the appointment of external board
members. By far, however, the primary source of all crisis (up to 85%) faced by family
businesses focus around the issue of succession.
Discussing the transfer of the family business reveals a number of unresolved conflicts
(e.g. real or perceived parental favoritism), resentments (e.g. the belief that the child
“has” to go into the family business when she has no interest in doing so) or frustration
(e.g. the owner’s lack of confidence in the successor’s ability to lead).
Rather than confronting and discussing these (and other) issues, families are more likely
to bury their feelings and beliefs, increasing the stress to the family and those working in
According to a 2007 Survey, 40% of all business owners plan to
retire in 10 years; a figure that is consistent with the number of
baby-boomers currently owning a business.
Of those expecting to retire in 5 years, fewer than one-half (45%)
had selected their successor.
Only 29% of those expecting to retire in 6 – 11 years had selected a
Close to one-in-three (31%) of all owners had no plans to ever
retire; essentially declaring that they would likely die in the offices.
By not preparing their successors, owners are creating a crisis for
those who will run and work in the business. The lack of planning
creates a leadership “void” that will be difficult to fill when the time
comes to finally leave the business.
In many respects, the family business can become a part of the family! The
business is frequently discussed. Its challenges and rewards are readily
Because of its history and opportunities 79% of the senior generation of
owners would like to keep the family business in the family.
And 70% of the successor generation has the same hope.
Michael D. Allen, Motivating the Business Owner to Act, SFA2 A.L.I.-A.B.A. 1, at 7 (2001).
While the reasons for Family Business Succession failures are
limited, addressing these issues will take time and require a
commitment for both (or all) generations.
First, 60% of all family business succession failures arise from
relationship issues, particularly how the generations work together
and the level of trust one generation has for the other. If the
successor, for example, distrusts the owners they will quickly go
their own way after receiving control of the business.
Second, 25% of all family business succession failures are due to the
lack of training the receiving generation has received. Even though
the successor has worked in the business, she or he may not be
equipped to operate and grow it.
Surprisingly, very few family business succession failures are due to
the lack of tax or estate planning.
6.Nepotism andSibling RivalryCanInfluence Succession Planning
In a 2007 survey by PriceWaterhouseCoopers, almost 67% of family
businesses give family members a role in the business without measuring
their performance. While this is unsettling for the managers and key
employees who have worked to grow the business, it can also impact the
relationships held between siblings as they consciously or sub-consciously
compete with one another for an increased role in the business.
This sibling rivalry is a frequent problem, with children competing for the
favor and approval of their parents. Parents may be aware of this and try to
keep one sibling from managing or reporting to another, yet the size and
scope of the business can make this impossible.
Additionally, a conflict can arise between those siblings working inside the
business and those working outside. Those inside the business – the active
children – may want to keep the cash inside the company, investing in its
growth and paying salaries for those who earn it. Those outside the business
– the inactive children – desire cash flow and can feel as though those inside
are being overly rewarded.
7.Founders andSuccessors CanDiffer
Founders may differ from successors, making family business succession
planning difficult; particularly for a larger business.
More often than not, the Founder started the business with a strong,
entrepreneurial outlook. They were – are – comfortable taking risks and over
time proved their ability to create wealth for themselves, their family and
those who work inside of their business.
Frequently, successors are not as inclined to embrace the characteristics
needed to continue to grow the business. A large percentage of family
members in the “second generation” have a difficult time with risk, choosing
to avoid it whenever possible. Rather than “growing” the business (and
thereby growing wealth) they are more likely to focus on “preserving” the
business (and the wealth) started by the Founders.
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