You Aren't Immortal, Your Planning Should Reflect That
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James Melton Reporting
You won’t live forever, so why run your business as if you will? Facing up to one’s own mortality is tough. And, for a family business owner, it can be even tougher to enter the minefield deciding who will be in charge after you’re gone.
But successful business owners don’t get where they are by ducking the big decisions. Planning for an orderly transition should be handled with the same resolve that built the company in the first place.
WWJ asked Richard M. Segal, founder and chair of the Family Business Council of SoutheasternMichigan, for his insight on the challenges and pitfalls of effective succession planning.
WWJ: What is the success rate of family firms transitioning to following generations?
Richard M. Segal: The Family Firm Institute states in their fact and figures that “more than 30 percent of all family-owned businesses survive into the second generation. Twelve percent will still be viable into the third generation, with 3 percent of all family businesses operating at the fourth-generation level and beyond.”
That alone does not tell the story. Remember that a generation is 20-25 years. So, to know if those stats are good or bad, you would have to know how non-family businesses fare over the same time period. Since it is believed that 50 percent of all startups fail in the first two years, a 30 percent-plus success rate over 20 or 25 years might be great. And 3 percent might be an outstanding number for businesses that last 80 to 100 years. In addition, we would need to know how many of those firms that did not make it to another generation may have chosen that path – to sell, merge or liquidate, or perhaps run out of lineage. I always like a different statistic – 35 percent of the Fortune 500 are family firms.
WWJ: Planning for one’s own demise or disability makes a lot of people uncomfortable. What’s wrong with running the family business as if you’re going to live forever?
Segal: That kind of thinking makes me recall Peter Pan, Tinkerbell and Never, Never Land. We can choose to deny our own mortality, but in doing so we are doing a huge disservice to everyone else. We all know that we are going to die – hopefully after a wonderful, long healthy life. Those who choose to not plan for their death really plan to dictate from the grave what will happen at their demise – and it seldom happens the way they planned it.
The point of succession planning is to provide family harmony and business success over the long haul, and I can’t see how that can work by dictating from the grave as if no one else mattered. Really, the most successful succession plans balance the wisdom and needs of the exiting generation with the skills, relationships and desires of the incoming generation.
WWJ: What are some common mistakes family business owners make in planning for a transition?
Segal: Besides doing no planning, the next biggest mistake is not seeing this planning as a process and treating it as a team sport trying to get to the playoffs. There are many stakeholders along the way that need to be included in order to get buy-in for the new ownership/management team. Excluding them in the process is likely to lead to mutiny later on. In order to develop the plan you need to huddle up your professionals (attorney, CPA, Insurance Professional, Lender, etc.) and bring them in on the strategy sessions – all together in the same room at the same time – so that you can hear them discuss the virtues of this and that. Once the plan is developed, it needs to be shared with the stakeholders … I don’t know why anyone would want to keep the people it matters to the most in the dark the longest.
WWJ: Many family business owners understandably want to be succeeded by another family member. What strategies can be used to make non-relative senior managers willing to stay on after the transition is made?
Segal: Sometimes it is the other way around – the incoming family managers want to remove those key senior managers in favor of their own people. Either way can shake the foundation of the business. The outgoing generation has usually built a loyal management team over years of working together. Often that loyalty is not transferable to the next generation, and to complicate matters those non-family senior managers may not be ready to retire. Often they are either a few years younger than the senior family members, or perhaps not as well set financially requiring more working years. It is important that management transition be treated as importantly as the ownership transfer, but frequently it is ignored with the exception of the family members. Generally, management restructuring is required and often a new strategic plan is needed.
WWJ: What is the key to getting families to address succession planning?
Segal: I have never found the one key that opens every door. Usually it is an event that either happens to the family – like a major health issue, or poor business performance. Other times it is watching a neighbor or competitor’s business suffer for the lack of planning. What I would really like to be able to tell you is that good professionals find a way to force their clients into proper planning, but it isn’t so. I will tell you this, the best key to open the door to succession planning is to have an ownership system that realizes that everyone is mortal and that premature deaths and disabilities do really happen – and then to plan for the “what ifs.”
Richard M. Segal is the founder and chair of the Family Business Council of Southeastern Michigan – a membership organization for family firms. Segal holds a certificate in family business advising with fellow status from the Family Firm Institute in Boston. (one of 105 such certificate holders worldwide.) He can be reached at RMSegal@aol.com.
This article appeared in an issue of The Daily Dash, WWJ Newsradio 950′s Business e-publication.
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