The statistics are clear - 70 percent of family businesses do not survive the transition to a second generation; 90 percent do not make it to a third generation. Why? To ensure ongoing and future success, owner-managed businesses must be prepared to survive a change in ownership whether such a change is voluntary or involuntary, expected or out-of-the-blue. Some owners may have trouble accepting it, but their eventual death is an instance of an expected transition that must be planned for to protect their estate and their successors. Ownership change might also come about because an owner decides to sell their interest to the current managers or to a third party. Hopefully, this would be voluntary. And, of course, the unexpected can strike at any time -- an accident, for instance, that permanently disables the owner and forces them to stop working.
As disruptive as a change of ownership under any circumstances can be, all of these events can be anticipated in advance, and a plan designed to accomplish a smooth transfer of ownership or management. If such a plan is in place, transition -- even in an emergency -- is much less likely to seriously disrupt the business. The plan referred to is a succession plan. The reason the statistics quoted above are so gloomy is that most owner-managed businesses do not have a proper succession plan.
A succession plan is a well thought out blueprint that dictates who runs the business in the event of the owner’s departure or demise, as well as who pays how much for it and who gets it. That's the hard part. Even after a business owner realizes the need for a succession plan, putting it into place can be a dispiriting experience. Often, no one wants to buy a company without the person behind it.
However, not having a succession plan introduces considerable uncertainty and increases the risk of volatile disagreements that could threaten the very survival of the business. In a business where the owners are related, the family relationships often intensify the emotional aspects of the events. The struggle for power and control between competing owners or a lack of leadership can quickly destroy a business.
The best way to ensure an orderly transfer and to clearly communicate the owner's intent is to create a written plan. A succession plan allows the same leadership that made the business a success, direct the ownership transition. It has often been observed that businesses with leaders who have the insight and influence to establish a succession plan are the businesses that survive and do well after a change in ownership.
To gain allegiance among present and potential owners, the written succession plan should state how the management group, which may one day take over the business, will be created and sustained. It is prudent to create a management group so that the business is not wholly dependent on its founding leadership for its operation and survival. The creation of a management group will also give the company an appearance of stability, which is comforting to employees, lenders, customers and others who rely on the company's success.
Some managers will aspire to ownership. To keep and train these valuable employees, there needs to be a clear path available to highest levels of management and eventually, ownership. Ownership of a business should not come on a silver platter. Founders of businesses know the sacrifices which were made to establish or acquire their business. It may, therefore, be in the best interest of the business if ownership is purchased with funds or assets accumulated by the purchaser. In such a case, the new owner will have struggled with the issues of value, saving and investing in the future, and liquidity that should accompany such a purchase.
Moreover, the succession plan must promise the new owner the ultimate status of parity with owners of the same seniority. In many cases, family members may be a part of the management group being groomed for ownership; however, it is almost always best for the business if advancement to control is based on merit rather than relationship alone.
A written succession plan and an enforceable buy-sell agreement, taken together, will help ensure the continuation and success of an owner-managed business when the founder retires to their beach front home.
By Brooke Hunter, President CAFE Upper Canada
Families in business face many unique challenges, yet tend to act in isolation without adequate support. Founded in 1983, the Canadian Association of Family Enterprise (CAFE) connects families in business with their peers and with resources for success. CAFE is a powerful network of families who want information and support to help them overcome these challenges and beat the gloomy succession odds.
CAFE can help - contact Steve Allen, President Upper Canada Chapter at 416-323-7800 or find out more about CAFE at www.cafenational.org.