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The following article was published in the Charleston Post & Courier's Business Major, a featured monthly column in the Business Review Section on March 25, 2002. Succession Plan Important to Family Business SuccessBy DOROTHY P. MOORE Special to The Post and Courier Business Major Family businesses make up a huge slice of the North American economy. According to an article in the Family Business Review, between 80% and 90% of all U.S. companies are family owned and controlled. Chartered as corporations, partnerships and sole proprietorships, these businesses create more than 78% of all American jobs. Most are classified as small businesses, meaning they have fewer than 500 employees, but many are very large. According to testimony presented to the House Committee on Ways and Means, families own 37% of the Fortune 500 companies and control 60% of all publicly held companies. The most difficult task a family owner has is to develop a plan to turn the business over to a successor. The succession of family businesses will be one of the big economic events of the next two decades. Notes Robert Avery of Cornell University, the largest intergenerational transfer of wealth in U. S. history is about to begin. Over the next 20 years, $4.8 trillion will change hands, and $10.4 trillion by 2040. Replacing the leadership is a critical transition for any business. But many family business owners hesitate, and one in every four winds up doing nothing besides writing a will. This can be disastrous. The failure to plan carefully for the business succession, according to the University of Connecticut Family Business Program, accounts for nearly half (47.7%) of the failures of family owned businesses. Warns the Center for Family-Owned Business, only three out of every ten family firms make it to the second generation, and "a mere 10% to the third." Developing a succession plan and getting it right is one of the most difficult things a family business owner must do. Psychological baggage, family rivalries, potential succession battles, the desires of owners to retain control and, sometimes, feelings of invulnerability figure into the equation. The realities of a family business going through a difficult period can make it easy to postpone succession planning. Owners have a significant investment, sometimes a lifetime, in building a clientele through not only knowledge and expertise in the field but in trusting relationships forged with employees, the business community and customers. They acquire a special sense of responsibility and a sense of accountability. It can be difficult to turn loose. At best, the process of writing out an exit prescription that ends with everyone understanding that you will be needed no longer is a challenge. Other reasons for delays in succession planning have to do with the fact that different generations have different values. It is easy for each to misunderstand the other. Examining the values inherent in generations involved in the transition is a good place to begin prior to passing the leadership torch. While many "veteran" business owners are still around and on their way out, most of the businesses are owned or managed or both by members of the "Boomer" generation. Born between 1946 and 1964, they grew up and came to maturity in an America growing more prosperous every year. Unlike the generations immediately before and after them, jobs were mostly plentiful when the Boomers were old enough and sufficiently trained to take them. Success was common, so much so that a goodly number of Boomers came to believe that anyone could lift him or her self up by the bootstraps. According to The 2001 Randstadt North American Employee Review, this group is not only accustomed to success and being in charge but are now turning 50 at the rate of 11,000 per day. The potential successors to the family business belong to Generations "X" and "Y" or "Xers and Yers," which is often combined into "Nexters." Born after 1960, Nexters grew up in a different world. Divorce, split families, and extended family relationships were more common for them, in part because many of their perennially optimistic Boomer fathers and mothers were unprepared for the economic shocks of the waves of corporate downsizing and business failures. Continually rapid changes in the economy, fierce competition among the large numbers in the birth cohorts, and economic slowdowns made this technologically sophisticated Nexter group more cautious. They also look at work differently than previous generations. Says the 2001 Randstad report, for them, "Work that isn't seen as a learning experience that leads to something better is seen as a dead end." Nexters are high on "Street Smarts." Because Boomer family business owners hold on to their positions of control and leadership far longer than their corporate counterparts, they look across one side of the generational divide. Many are not assured by what they see. According to one study, more than 80% of them want the business to stay in the family. But one owner in five is not convinced the next generation is up to the job nor ready for the new style leadership required to be successful. The key issue is to identify the potential successor who is up to the challenges of owning and managing the family business. Will that individual have the same sense of caring about company values, goals and the important dynamic created with employees, who have in many cases devoted a life-time or a major portion of their careers to the family owned business? Maybe not. In my interviews with successful business owners around the nation I met many whose most difficult conflict was between the roles of parent and small business owner. Some had the unpleasant experience of having to fire a son or daughter because the latter were incapable of exercising good judgement consistently or did not have the drive to work really hard or could not demonstrate the intellectual and people skills the business needed. For a successful transition, both generations, founder and successor, must devote time and energy to a careful and honest study of the process. This is not easy. Such a study requires a high level of candor and evaluation on all sides. But in the end it can save the valued family relationships on which the success of the business has been built and the business itself. The first step can be the most important. The owner needs to identify that special member of the family who has the entrepreneurial spirit to manage and lead the company irrespective of the challenges. This family member must be capable of thinking beyond his or her own personal interest, have a commitment to a high standard of ethics, and most of all have the knowledge, skills and aptitude to continue to develop the business in an ever changing global marketplace. This is quite a protocol. One way to resolve this step is to encourage family members to gain the expertise they need by working for someone else first. This first step may also lead to a conclusion that the next owner of the business has to be someone outside the family. Because all the needed abilities may not be in place, the assignment for the second generation, if interested in taking over, is to be a quick study and acquire the repertoire of necessary skills. This most likely will mean additional training and education. Writing a thorough business plan, the same first step that new entrepreneurs should take, is a good place to start. The transition plan can identify the strengths of the existing business, the opportunities that may open up, and threats that could undermine the business in the future if something is not done to counter them. The transition plan should address what is needed to put in place a competent leader and manager (both traits must be present). Discussion of the impact of family dynamics is unavoidable and critical. Understanding the interlocking frames of reference and common ground between generations is a healthy preliminary to addressing any conflicts that exist between family members of different generations, and may make it possible to develop a more effective succession strategy. Looking ahead to a family business transition? The web site AllBusiness.com, which lists the universities that host family-business centers, provides special tips and assistance in succession planning and this is a good place to start. For Questions/Comments about this site, contact dot.moore@comcast.net. 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