Thanks to this week’s contributor, Matthew Erskine, who discusses some of the challenges of business success vs. ownership lifestyle as part of the perennial succession discussion. This thoughtful short piece is something advisors might use with their clients as an educational tool and/or a way to surface some difficult topics.
A major hurdle of building and maintaining a successful family business lies in one of its most dreaded aspects– succession planning. The complications of family relationships in a business context can make succession planning an emotional and often contentious process. Acknowledging the inevitable can be difficult for successors; that the senior members and family elders will one day, for one reason or another, be incapable of performing their roles. A good succession plan provides a roadmap for leadership to transition seamlessly from one owner to another, and certain missteps can prove fatal to the company if this transition does not happen smoothly. Being aware of these potential pitfalls grants family business owners the ability to avoid these unnecessary failures, and achieve peace of mind in knowing that future generations will be adequately prepared to fill their role when the time comes.
By one set of metrics, the survival rate of a third generation family business hovers around 10%, a grim statistic to consider. Many family businesses mistakenly focus on the current generation of ownership, and prioritize the financial needs of the owners in maintaining their current lifestyle throughout retirement. The focus must shift, ensuring that succession planning prioritizes the commercial viability of the business, to avoid future sacrifices in favor of retired family members. This can raise issues among shareholders, current owners, and heirs — and can result in lengthy and disruptive power struggles. By identifying a unified goal for all parties it can be certain that succession will be driven forward in the same direction by each entity in concert.
Family dynamics, whether a tug-of-war for control between parents and children or a magnified case of sibling rivalry, can be the undoing of a business. Succession often occurs under emotionally charged circumstances, such as the death of a parent. If a plan is vague in describing the future chain of command, or if plans are not disclosed to all family members, the business can be destroyed as family members allow personal disputes to play out on the business stage. Parents should abstain from using family wealth as a factor to convince children to acquiesce to demands. Similarly, in the process of inheriting a business, children should objectively view the defined succession roles as decisions made in the best interest of the business rather than an egregious show of favoritism.
It is imperative for families to understand that, while ownership of the company can remain in the family, the active leadership role in a business must be filled by a suitable candidate. If all possible heirs are unable or unwilling to perform these tasks in a manner commensurate with the interests of the business as a whole, a surrogate must be considered. Conversely, owners must avoid undervaluing the contributions and talents of family members by turning the business over to a management team that does not share the goals identified by the family.
The transition from one generation of ownership can be rife with challenges, but an objective succession plan with clear goals can allow owners to be confident that the business will continue to grow and provide a legacy that will serve as a point of pride and success for generations to come.
About the contributor:
Matthew F. Erskine is the 4th generation member of his family law firm, The Erskine Company. He can be reached at firstname.lastname@example.org.