Every business owner doing succession planning should know these two sobering statistics: First the good news; 97% of professionally drafted succession documents pass wealth to the next generation successfully. Second, however, about 70% of these same family businesses will fail within the next generation.
Why the disconnect?
They had a great succession plan with all the right things from a legal, financial, and technical standpoint. And they used excellent advisors. But they failed to consider the single most dangerous aspect of succession planning: family harmony.
Certainly, there are market and competitive forces that always influence a business’s ability to sustain itself, but just as often there are human forces that come into play that will disrupt and destroy even the best laid plans. External forces can be very powerful, but internal forces can be even more destructive.
In my work with business owners and their families doing succession planning, I've seen three common problems that will doom a family-owned business:
- Poor communication skills. People are unable or unwilling to tell each other the truth and express their feelings. The inability to have honest, forthright discussions about important matters damages trust. People feel there are hidden agendas and retreat to their own defensive positions. Trust thrives on effective communication; effective communication begins with trust.
- An entitlement mentality. Children of privilege often lack a sense of perspective. They learn to feel that they are special and that what they inherit is a right, not a privilege. They can feel that the laws of the Universe don’t apply to them. This is a poor foundation on which to build. Hubris and lack of motivation will erode even the strongest organization.
- An acquisition/appreciation imbalance. A family member who does not appreciate the value of a dollar -- and gets their satisfaction from buying things -- will upset family relationships. Jealousy, resentment, smoldering anger and outright conflict will result when there is no appreciation of what the family shares. The constant need for more, especially at the expense of the other family members, is corrosive.
These are the "big 3", and when they come together disaster is not far behind. Let me share with you an example.
Several years ago, I worked with a family that had an Ohio branch and a Texas branch. The Ohio side of the family owned a manufacturing business that was small but profitable. It was the original source of the family’s wealth. Their work ethic was sound and they appreciated what they had.
The Texas branch of the family, however, lived where the family’s big wealth had come from, oil. For these folks, lavish lifestyles and abundance were what they had always known and what they expected. For some of them, as Mae West famously said, “Too much of a good thing is never enough.”
The disconnect between the Ohio and Texas sides of the family was about to cause a very public - and very expensive - lawsuit. This would have broken the family apart and crippled their wealth-building potential.
We worked with them to develop a set of mutually approved operating agreements called a family charter. This document detailed how they were going to work together. We also helped them form a family council that would keep them in touch and provide a way to express and work through whatever disagreements they might face in the future.
It took some shouting, some cajoling, some tears and some hugs, but they made it through. The two sides of the family found common ground and a common direction. They were able to transition the business from a primarily emotional connection to a professional working arrangement.
They have since gone on to work together to multiply the family’s wealth and to serve as advisors, investor partners, and role models for other families who share a pool of wealth.
Think about those statistics again: 70% of second generation businesses will fail despite excellent succession planning. What can you -- the first generation -- do now to address the Big 3 causes of failure and disruption that are almost certainly in your future?
You’re wise to work with a firm like FUSE Financial in order to help keep your business from becoming a casualty of poor planning, but have you considered the human side of the equation? Addressing the interpersonal issues upfront and transparently will help insure that you and your family emerge from a succession process intact and perhaps stronger than ever before.
Since 2001, Robert Caldwell, M.A. of Family Firm Resources, LLC has been the Babcock Family Business Fellow at Wake Forest University. For over 20 years he has helped the members of family-owned and privately-held companies and their stakeholders collaborate for successful succession planning. His recent book is entitled Notes from the Field: 20 years of coaching family business
Robert can be reached at: firstname.lastname@example.org or 704 517 2111