Why Family Business Succession Plans Fail: Planning Strategies That Work

By Jeff Harris

A seminal event occurred this year that will have a profound impact on family businesses in the years to come. The first baby-boomer turned age 60 and here is why it’s such a big deal. Many of these baby-boomers own successful businesses and they’re seriously thinking about (if they haven’t done it already) reducing their work schedule so they can spend more time doing the things they love. For those with a son or daughter who is working in the family business, it’s natural to want to pass the business on to them.

Sometimes, this works out great for everyone. But all too often the second generation simply doesn’t have the mindset to continue the business effectively. In “Beating the Midas Curse,” estate attorneys Rod Zeeb and Perry Cochell reference studies that show 65% of second-generation family businesses fail and a mind-boggling 90% of third-generation businesses fail!

Now when you consider that many of these businesses had extensive traditional succession plans drawn up by brilliant attorneys, something is dreadfully wrong! Notice that they used traditional succession plans. Traditional succession plans deal with legal strategies and tactics to avoid taxes and transfer control to the next generation. But they don’t address values, morals and matters of the heart.

Matters of the Heart: What do values, morals and matters of the heart have to do with successful succession planning? Anecdotal evidence suggests this is a crucial component (and very often overlooked) by business families who want to pass on their business to the next generation. As mentioned earlier, statistics show that 65% of second-generation and 90% of third-generation businesses fail. So what can those few business families that manage the succession process successfully point to as the primary reason for their positive results?

Either knowingly or unknowingly they have managed to pass on their values, morals and positive family heritage; in short, matters of the heart. If you talk long enough to any thriving second or third generation business family you’ll find they have, to a large degree, embraced their grandparents’ and parents’ positive heritage. No, they’re not brainwashed into behaving like clones of Mom and Dad, they have their own ideas and personalities.

They’ve recognized the positive threads that run through their family that has led to their personal and business success. They’re smart enough to realize how they too can benefit from these family traits and they’ve “caught” them over the years. Unfortunately the professionals who counsel business families as to appropriate succession strategies and tactics aren’t trained to deal with matters of the heart. Often, they don’t realize how critical this is to successful succession planning, so they do what comes naturally; they ignore it. The dreadful statistics speak for themselves.

So what can you do to ensure your family business successfully passes to the next generation? You can hope the kids and grandkids pick up on your positive family traits, or you can utilize a proven process designed to do just that. It’s a process that’s been fine- tuned over the past twenty years and it consists of the following five steps.

Step 1: Determine what’s important to you: Unless you know what’s important to you and your family, you can’t make sound decisions that will impact future generations. That’s why the first step is to recognize what your family’s core values are and how your positive family heritage has led to the success you enjoy today. Some questions to consider are: “Who was the most influential person in your life between ages 10-15 and why?” “What challenges have you overcome, and what traits got you through it?” “What does an abundant life mean to you?” and “What three things would you want your great-grandchildren to know about you?” You may be surprised to hear your own answers. But by uncovering what has impacted you in the past, as well as what you envision for your future, you can see patterns emerge that can help guide your succession planning process.

Step 2: Create your family’s vision statement: Once you’ve determined what’s important to your family, you can create your family’s vision statement. This is usually a four- to ten-page document designed to unify and preserve the family by articulating what’s most important to you. Think of the vision statement as a guiding light for children, grandchildren, and future generations, helping them understand their unique family heritage and positively influencing them to live fulfilling, meaningful lives. To supplement the vision statement, you can also create a video of the family history, where each parent and/or grandparent “tells their story” so it can be passed on to future generations.

Step 3: Hold a family meeting: No matter how well you articulate your family vision statement, it can’t do its job if it isn’t properly presented to family members. By answering a series of highly targeted questions, such as, “If you received a check from your parents for $100,000 today, what would you do with it?” and “How have you seen your parents demonstrate the values described in the vision statement?” your heirs will be guided to self-discover the power and value of the family vision statement. Remember, you can’t force your heirs to live lives of significance. In fact, the harder you try to tell them “what’s good for them,” the greater they will resist. Therefore they will need to be guided to discover on their own the value of, and personal benefits to them, of the family vision statement.

Step 4: Create a Family Council: The Family Council is a powerful tool to help build family unity and cohesiveness through a shared vision of the family’s purpose. Family members are given specific duties and responsibilities, such as investigating how to invest family money together, identifying those charities and causes that best align with the family’s values, setting up future family council meetings, and establishing a budget and agenda, which requires engagement with other family members to accomplish their goals. Ultimately, the Family Council serves as a repository for all the experience, connections, education, know-how, business and people skills the family has acquired over the generations.

Step 5: Get your team involved: Now that you know what matters most to your family and everyone is on the same page, you need to keep your attorney, CPA, stockbroker, insurance agent, and anyone else assisting with your family business succession plan abreast of your desires. Armed with a copy of your family vision statement, these various professionals can help turn your desires into reality by using their unique skills to create strategies, tactics and tools designed to bring your vision statement to life. Realize, though, that this concept of “family first” may seem foreign and unnecessary to some of your advisors, as their focus is tax savings and legal strategies, not matters of the heart.

No Thanks: At this point it would be normal to think you’re okay and your family succession plan will work just fine. That may be the case, but think about this. As you get older, your influence will naturally wane. Son-in-laws and daughter-in-laws may not hold the same values and morals dear that have served your family well.

As your influence declines, their influence will grow. That is unless you have a process in place designed to preserve your values, pass on your wealth and help your family live  lives of significance working in a thriving family business. Yes, it takes time and resources to complete this process. But it could mean the difference between a thriving business that continues to bless you and future family members, or a sad statistical foot note.

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