Crafting a succession plan in a family-owned business ensures its survival and growth and also enhances cohesion and preserves the entrepreneurial spirit across generations.
Nearly two-thirds of family businesses don’t have a documented and communicated succession plan, according to a 2023 PwC survey.
Data shows that only 30% survive the transition from first- to second-generation ownership. Lack of a succession plan is often the primary issue, said Tom Marx, senior partner at Hart Marx Advisors.
“If there is no family member that wants to carry on when the founder wants to leave, then a key employee or younger partner needs to be sought early in the business’ life cycle,” he said.
Entitlement can also be another factor in cases such as when successors haven’t earned respect and can’t lead or when owners won’t make room for their successors to lead, added Hugh Roberts, a partner at The Rawls Group.
In succession planning for a family-owned business, Alberto del Pilar, managing director at ButcherJoseph & Co., said a corporate strategic plan is needed to survive the market and compete effectively. This is followed by a qualitative and quantitative analysis covering the strengths, opportunities and priorities in the business.
A vision for the company where all stakeholders are brought in is essential too, he said. Additionally, you need the appropriate employee culture to support a company’s vision and corporate governance structure.
Marcia Taylor, president and CEO of Bennett Family of Companies, agreed and noted that it is key to ensure the next generation is aligned with the business’ purpose, core values and goals.
But it’s not just about handing the baton to the next generation, Roberts said. “It’s about making sure the business continues to be successful for the next 30 years.”
Roberts said they call it the Succession Matrix, which includes factors like the owner’s motivation and commitment to continuing their legacy; the financial implications of succession; the business’ profitability so it can sustain the predictable dip in profits during leadership transition; the successor’s readiness and a contingency plan if they aren’t; the management team’s effectiveness; and a strategic plan to drive the succession plan.
“All of these issues can undermine the ability for the business to continue from generation to generation,” he said.
Jason Cowan, president of Silver Creek Transportation, initially considered passing the business down to his sons to take over. As the business grew, Cowan didn’t see it as a viable plan and realized they needed an exit plan.
“Your plan has to change as your season of life and business change,” said Cowan. “Many people only make a plan for when they retire or are older, but we need to be prepared at any time.”
Whilst his sons expressed interest in management and ownership when the time comes, Cowan said they also hired an operations manager to have continuity in business. “It just made sense to do it this way so my sons can have a person they can trust if I’m not there,” he said.
Shifting to new leadership
In addition to developing a strategy for succession, a timeline is essential. Often, the next generation wants to be given the reigns to take the business to the next level, and the older generation won’t let go.
“A commitment from the founder to step down to the successor is needed. Otherwise the process often doesn’t happen until the successor is frustrated because they cannot step in to run the business,” Marx said.
When transitioning to new leadership, it’s critical that new leaders earn the respect of the management team. “An owner can give their successor a job, a title, a paycheck, but they can’t give them respect; it has to be earned,” Roberts said. “This means the successor must become fully trained in all aspects of the business, paying their dues, so that respect will be earned.”
Having the right work ethic and attitude is important, Roberts added. “A successor is under the microscope as the owner’s child, meaning the employees are expecting that person to not earn their position, rather have it handed to them.”
Equally important is having a consensus on the competitive landscape and the best way to compete, said Del Pilar. “If you don’t have that kind of understanding of what the customer needs, what the competitors are doing, then it’s going to be hard to have an effective organization.”
Another challenge in leadership transition is identifying the kind of leadership needed, Del Pilar pointed out. “What areas of know-how, knowledge and leadership skills are we really missing? Because you can be going through a transition period where you’re just maintaining the status quo, and that’s not much of a difference.”
It’s crucial to recognize and select the correct people to fill the operational needs of the business, he said. With various market conditions, Del Pilar said, you need a leader and a business model to effectively adapt to and be proactive in the landscape.
Amid uncertain market conditions, Taylor said they maintain unity despite disagreements and stay focused on their team and purpose. “We come together to concentrate on the business, keep debt low and recognize that it’s not just our family, but the entire Bennett family, working together.”
A healthy business makes a huge difference in ensuring long-term survival, Marx said. Current technology, strong earnings, consistent growth and willingness to take risks all make for a lucrative environment.
