7 Warning Signs Your Business Succession Will Likely Fail
History has proven that 70% of family businesses will not transition to the next generation. Will yours be one of the statistics? Based on our experience guiding families to a successful transition, here are 7 warning signs you are headed for serious problems:
1. Whose Passion Are You Considering?
As the current owner, are you more concerned about having a family member take over the business than having family members find their vocational passion? You likely founded the business, so it is your “baby”, and you care deeply about it. You have poured your heart and soul into the business, so it is natural for you to want to see it continue after you, and who better to run it than your child. However, just because it is your passion does not mean it is their passion. Your children have unique personalities and skill sets, perhaps none of them have your passion for business and/or business abilities. Perhaps they do, but not for your business. Shifting your mindset from the business being kept in the family to the business as an asset that can benefit you and your family is liberating for all. This asset can be sold to a family member if they are passionate about the business and have the skill set and drive to be successful, or it can be sold to someone outside the family that has those characteristics. Either way, resources are released to fund your future and help your children pursue their passions, whatever they are. Shift the focus from you to the next generation.
2. Gifting Of Shares
Giving children shares in the business or selling the shares at a discount rather than having them pay fair market value leads to several challenges. Often it creates or enhances an attitude of entitlement. They feel they have a different treatment than other employees. You are communicating they do not have to perform or work for the shares. You skew their thinking by not having them make a well-researched business decision. They are not forced to examine all aspects and determine if buying the business is their preferred option. It communicates they do not have to be accountable for their results. The marketplace will quickly communicate another reality.
3. Children Without Outside Experience
Working for mom or dad as a summer job may be an easy way to find work as a student and a good experience for both generations. However, if there is potential that they work full time in the business they need to first work full time elsewhere. It will take 2-3 years working outside the family business to know what is required to be successful when they are not related to the boss. The work ethic, attitude and approach are different by those who are successful through their own merit. They will learn how to properly interact with their superiors. If they are still interested in the family business after this experience, you have gained a much more valuable employee with a more realistic perspective. If they do not return to the business, you have avoided all the problems that come with a poor employment fit, plus the resulting family dynamics.
4. Different Performance Standards
If you have children in the business, do they have the same performance review process as other employees, do they have the same accountability, and the same standards or are they treated differently? If not, you are not helping them develop to their potential. You are likely creating friction points with other employees, and you are hurting your business. Business is too competitive to have any employee not pulling their weight. If they were not a relative, would you hire them or keep them as an employee?
Starting junior, in their 20’s, as a vice president serves no one. You are back to double standards and the challenges that it creates. Children need to have a career path similar to anyone else with their training and skill set. The business will flounder if they are not experienced and proven in every role they have. Positions need to be earned and deserved and not given due to surname, birth order or gender. Your oldest son is not the next president by default. He (or any child) should not even be a candidate unless and until he has the appropriate passion, experience, and skills. In addition to challenges with other staff, this will create big challenges between your children whether they work in the business or not.
Do you have two standards for pay or are family employees paid fair market value for their job? This can happen in either direction. They could be paid too much, leading to entitlement and double standards or they could be underpaid in recognition of getting ownership in the future. Lack of clarity is a lit fuse between two different perspectives. All employees need to be paid fair market value for their role, responsibility, and performance. In addition, owners are paid their proportionate share of the profits. Two potential roles, two potential forms of income, clear distinction.
7. Waiting Too Long
It is not uncommon for ownership transition to take upwards of a decade. Management transition will take several years. If you are within a decade of wanting to be in a position where you can slow down, or the next generation is capable of more, you need to be starting succession discussions. If the next generation is skilled and capable, they will only wait so long to move into an ownership position. It will happen, in your business or someone else’s. Succession is difficult enough without the added stress of having it forced by a major health issue of the current owner. Be proactive; make the choice to start the succession process rather than having it forced upon you.
Business is too competitive to have any employee not pulling their weight. If they were not a relative, would you hire them or keep them as an employee?
It is an extra bonus if you have family members that have the passion, desire, and abilities to take the family business to the next level. But if you do not, preserve the business value by selling it and determining how best to use the assets to serve you and your family. The succession of a family business is a difficult process in the best of circumstances. If you have any of the above symptoms, you need to address them right away. It is not easy but if you do not, you risk having children underachieve, disgruntled employees, eroding relationships with your children and between children and a business with a terminal condition. It is not a journey to take by yourself.
It is impossible to give yourself an objective perspective or to hear objectively from family members. If you want to succeed at succession, call us today for a no obligation discussion about your family business.