Preparing for transition
The Perils of Not Planning for Succession in M&D Family Businesses [Infographic]
As a key member of a family-owned manufacturing or distribution company, you’re often so preoccupied working in the business that you forget to work on the business. But the very future of the organization you labor so hard to sustain and prosper demands your attention now. If you want to keep its value intact and pass it down smoothly and peaceably to your heirs, you simply can’t procrastinate on formulating a succession plan.
Succession planning should be as much a part of your regular discussions and activities as research and development, revenue growth, and market expansion. Otherwise, you leave your business — and quite frankly, your family itself — vulnerable to considerable risk when the time for ownership transition comes.
Infographic: outcomes of planning for family succession — and failing to
Succession planning for family businesses is fraught with emotion. That’s why they tend to avoid it. I’ve discovered that I can talk to owners all day about the great things that can happen with a good plan in place. But it seems I only really capture their attention when I present worst-case scenarios. When they finally understand that failing to plan can — and often does — have catastrophic consequences, they start to take action.
Illustrations help make that point. This infographic shows a typical family-business scenario and what could go wrong or right if the owner were to die unexpectedly. It’s a real possibility for every owner. What would happen to your business — and more importantly, to your family — if the unthinkable happened to you?
Lack of preparation: an ongoing and concerning trend
CLA’s most recent survey of manufacturing and distribution industry leaders again found some worrisome figures about our respondents’ overall preparedness for succession. Sixty-one percent said that their company will have a transition event (ownership, leadership, or both) within the next 10 years. Half reported that they are somewhat prepared for this momentous occasion, while another 29 percent are somewhat or very unprepared; that amounts to 79 percent who are not quite ready to hand over the reins — and as soon as a year from now.
We get similar survey results each year, and I see firsthand how the lack of preparation plays out in the businesses I work with. I think the planning deficit boils down to the psychological complexities of family dynamics. Passing along a business within a family is a highly sensitive matter, and the feelings tied up with inheritance are very strong. Families often don’t like to talk about it, so they just don’t. Planning for transitions falls by the wayside until it’s too late. Sadly, this sometimes leads to bitter arguments, feelings of betrayal, and even estrangement.
Be honest with yourself: Are you in that high percentage of owners unprepared to transfer your business? Are you stalling on planning because you think that things will just take care of themselves somehow, or because it’s a touchy subject you’d rather avoid? If so, consider the potentially devastating effects of neglecting to plan.
A good succession plan prevents hard feelings and misunderstandings
Ironically, honest discussions about each family member’s future role in the business prevent more family discord than they cause. Failure to communicate candidly is the biggest mistake I see in family succession situations, and one that often has devastating consequences.
I worked with a company, for example, whose owner’s daughter was a ranking manager and the heir-apparent; she wanted to be the next owner and carry the business into the next generation, and she was a very capable, ideal successor. But her relationship with her father was compromised by another family member’s interference, so the conversation — and therefore the plan — never materialized out of sheer avoidance of conflict. The daughter’s uncertainty about her future and career, and her feelings of resentment and frustration, eventually led her to abandon the pursuit altogether and look for employment outside the family business. Now her father has quite possibly left himself without a viable successor. He is also fighting to maintain family peace make amends with a disenchanted daughter. When his time for retirement comes, his only remaining option will be to sell the business to someone outside the family. It’s a heartbreaking and pointless loss for both of them.
Examples like this abound. It’s why we say that succession planning starts yesterday. And by yesterday we mean the day you founded or took ownership of your business. This sad situation could have been averted if a plan was in place from the start. The family member would have been prevented from exerting undue influence on the father-daughter business relationship, the father wouldn’t have been pressured into dividing his loyalties, and the daughter would have known where she stood all along. The plan would have provided everyone cover from their lesser impulses.
A good succession plan offers inheritance equitability outside the business
The second-biggest mistake I see owners make is insisting all their children must be treated exactly the same when arranging the succession plan. They believe it is only “fair,” for instance, to gift equal shares of the business to all of them, when in fact they each have varying degrees of talents and achievements within the business. Slicing the company into equal portions may sound like a reasonable plan, but in most cases it will probably cause problems.
It’s an understandable sentiment; you don’t want to favor one child over another. But endowing heirs with titles they don’t deserve and responsibilities that are beyond their skills is also an injustice. Plus, you potentially set them up to do battle with each other and damage sibling relationships, sometimes beyond repair.
Instead, you could identify the most qualified leader from among your heirs, restructure the company so that he or she receives the appropriate portion, then leave other assets of your estate to the other children. This is just one possibility that allows for equitability while preserving the integrity of your business, positioning it for future success, and safeguarding your family harmony.
How we can help
If you find it unsettling to talk about the future of your business with your family, we can help you ease into the conversation with succession planning fundamentals, and then move into more sensitive yet critical matters. CLA’s manufacturing and distribution industry professionals have helped numerous family-owned businesses make smooth transitions to the next generation while preserving family unity and managing expectations.