10 Business Succession Problems Faced by Family-Owned Companies
Selling a business is hard enough. But when the owner of a business wants to keep ownership within the family, the challenges and problems that can arise in the business succession process are often too much to overcome.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
That’s probably why 47.7% of family owned businesses collapse after the founder dies – and that figure doesn’t include unexpected deaths of owners. That figure includes only business failures where the founder’s passing was expected to happen. Even though they knew it was coming, they still failed to adequately anticipate and plan for a way to surmount the many challenges and problems associated with business succession.
Business succession is hard to do well.
And you’re about to see ten problems that – if you don’t deal with them when you have the chance – will increase the chances of your succession failing too. If you’re looking for mistakes to avoid, you’ve come to the right place.
Pillar Wealth Management has served as the financial advisor on dozens of business sale teams, alongside investment bankers, lawyers, accountants, and other specialists. If you want to avoid having business succession problems destroy your company after the founder or current owner passes, schedule a call with one of our founding advisors, Hutch Ashoo or Chris Snyder.
And to make sure your investments are protected, get our free guide, 7 Secrets to High Net Worth Investment Management, Estate, Tax and Financial Planning. This guide was written exclusively for high and ultra high net worth families who have $5 million to $500 million in liquid assets. It’s filled with mistakes to avoid, strategies to utilize, insights about why so many financial advisors fail to deliver the financial serenity every ultra high net worth person wants, and so much more.
Now, here are ten business succession problems that can derail even the most stable and profitable family-owned business enterprise when the owner attempts to transfer it to the next generation.
1. Business Succession Pushes Good People Out
When succession happens and ownership stays within the family, this process can cause disappointments, resentments, and grudges that have festered for many years to come to the surface. And that doesn’t apply just to the family.
If other people on your company’s leadership team don’t like what they see happening in the succession of your business, and don’t feel like their voices are being heard, they might jump ship. And that’s bad, because if the success of your business has happened in part because of these great people working at the leadership level, the business can start to struggle afterward, even if the succession itself feels like a win at first.
Plus, if the new owners do things differently than the previous owner, it might ruffle the feathers of some influential members of your team.
Make sure you are listening to anyone who has a stake in the outcome of your succession – not just the new ownership team. Make sure people who have helped build, grow, and sustain the company are heard. Give them a voice at the table. Seek to understand their perspective. You don’t want to lose your best people right after the ownership transfers.
2. New Owner Is Unprepared after Business Succession
One of the biggest problems with passing business ownership within the family is that, many times, the new owner lacks experience. If they’ve grown up in the business, that likely means they couldn’t be fired, since most parents would never fire their own kids. Other employees treated them differently. So did customers if they knew this was the son or daughter of the owner.
That kind of protection prevented them from facing true adversity in business. They didn’t have as much at stake. They haven’t experienced real risk of failure when making decisions, trying new ideas, hiring the wrong person, or managing a team, because the perception will be that their parent the owner would always come in and clean up the mess, if necessary.
Thus, the new owner isn’t just unprepared and lacks grit, but they may also lack respect from other leaders, who know deep down that this person hasn’t been through the meat grinder. They know this person never would have been hired if they weren’t a relative of the owner.
What can do you to give your expected business successor the experience they need to succeed as the owner? Here are 7 ways to plan for a successful business succession.
It takes about ten years to “identify and develop a successor”, says Gallup, if you want to do it right. There is no exception for family members.
That’s why reason why starting too late in the business succession process greatly increases the chances of failure.
You need to start thinking about your succession plan years, if not decades, before you intend for it to actually happen. If you have a son or daughter, or other relative, who you think has the right combination of skills and talents to lead the company, it’s almost a certainty that they aren’t actually ready for the job.
But if you start thinking about this and planning for it now, you can get them ready for when the time comes. If that time is over ten years away, you’re in great shape! Start now.
Only 16% of family-owned businesses and companies have talked about and created actual succession plans. That means most aren’t ready. If the time to transfer the business comes sooner than expected, you’re in for a bumpy ride.
Don’t put this off.
4. Reduced Financial Benefits for Ex-Owner
If your company starts to falter after the succession process is complete, that post-ownership financial payout you were counting on to continue in perpetuity may end up withering and even disappearing.
When succession happened, for example, there might have been plenty of profits for everyone to feel perfectly good about paying the previous owner a generous monthly payout, say $500,000.
But if the business starts to struggle, what’s going to be the first thing to go? That payout, naturally.
That’s why taking steps NOW to protect your wealth using proven strategies that avoid undue risk and deliver rock solid growth and security is so important. See our free book for how to secure your ultra high net worth, 7 Secrets to High Net Worth Investment Management, Estate, Tax and Financial Planning.
5. Conflict Between Owner and Relatives
This is a big one.
There are countless stories and analyses of failed family business succession experiences, and these go back a long way. Here’s a very detailed exploration from 1971 that is just as relevant today except for the lack of female ownership.
Some owners are so set in their ways about how to run their business that they struggle with letting anyone else ‘mess’ with it – including their own adult children who are, in fact, qualified to take it over. Some owners draw so much sense of identity and worth from their business that they just can’t bear to part with it, even though they know they should, and keep telling everyone they’ll retire soon.
This behavior can go on for years. Plans get delayed and postponed. Good people get tired of waiting, give up, and move on. Children get burnt out because they want their opportunity to lead, but it is slipping them by as the business starts to struggle because of the inaction from the owner.
Also, some relatives really aren’t qualified to lead the business, but have an outsize voice nevertheless, such as in board meetings.
There are ways to work through family conflicts related to your business, but it requires patience, commitment, and some humility from the parties involved.
6. Unclear Roles Devolves Process into Backbiting, Jockeying
Imagine you have five relatives all capable of taking on various leadership positions. This might go beyond sons and daughters, depending on age. Could include nephews, cousins, even grandchildren. In addition to them, you have other senior level leaders.
Who is doing what as part of the succession process? What is expected of each person? Who has a stake in what, and does everyone agree to that?
If you don’t run the process with skill, consideration, and dexterity, where everyone knows what to expect, you invite pernicious forces to invade and destroy the process. If people start mistrusting motives, gossiping and slandering each other, or using other forms of manipulation to make themselves look better than someone else, your business succession is in peril.
Do everything you can to prevent this from happening.
7. No Apparent Successor
This is one possible consequence of procrastination. But there are also situations too where an owner genuinely wants to pass the business on to someone in their family, but they just can’t find anyone.
Some kids who are qualified aren’t interested. Others aren’t qualified. There may not be anyone in the family who stands out as a clear choice to lead the company.
That’s a hard situation for an owner who wants to keep the business in the family. It might require deciding to sell the business to an outsider. Or, given enough time and considering perhaps extended family as well, the owner may yet be able to find a family member to pass it on to.
This is another reason to start planning now, and not wait, even if succession is many years away.
Because not having a successor is just about as bad as not having a plan. Sometimes a successor may be found, but there’s no plan at all in place. You saw the statistic on this earlier, that only 16% of family-owned businesses have an actual succession plan in place.
Get started on your business succession plan now, even if you don’t have a successor identified yet.
8. Avoiding Uncomfortable Topics
When it comes to family business succession problems, there are two categories. One category is procedural, and the other is emotional.
The procedural problems come up in every single business sale, no matter who owns it or who is buying. These are things like legal issues, the financial details of the succession, and tax issues. In other words, the things that your financial advisor can help you work through as part of your business sale.
This is the role played by Pillar Wealth Management, and that’s why we’ve worked on so many business sale teams. The legal, financial, and tax minimization aspects of business succession are critical to giving the owner the best possible deal. Schedule a free call to discuss adding one of our founding advisors to your business sale team.
But that’s just the procedural problems.
Some of the other succession problems, as already discussed, are emotional and relational. Is the owner ready to sell? How do they feel about giving up the business they may have built from scratch? Does everyone agree to the new ownership plan, or is there conflict? Does everyone know their role?
You can’t avoid these topics – even though they can be very uncomfortable.
If you do, and if you just focus on the technical stuff without making sure everyone’s feelings and interests have been considered during the process, the whole deal can implode when a key stakeholder quits the process for reasons you shouldn’t have avoided and could have addressed earlier.
Don’t avoid the hard stuff.
9. Sibling Rivalries
This goes along with the last one in part, but it’s extra important to pay attention to if you have several adult children who either want to own the business, or want key roles within it.
Sibling rivalries can tear apart a board, a leadership team, and an entire company. This goes back to making sure everyone involved in the business succession has a clearly defined role and has agreed upon the expectations.
It also means making sure the siblings are qualified to do what they have already been tasked with, or are aiming toward. This can be hard for a parent, to realize their children aren’t qualified to run their business, even though they want to. But this is also yet another reason to start planning for your business succession sooner, not later.
10. Business Fails to Fund Family’s Lifestyle
When the business supported just one family – the owner’s – they could generously fund the lifestyle they have built for themselves. But after succession to new owners, there might be multiple households all benefitting from the wealth produced by the business. Kids, grandkids, siblings, and even cousins may now have a role in the business and receive some of the financial rewards from it.
But this can get expensive.
As the number of households expecting to benefit from the wealth of the business increases, so does the strain on the business itself.
For example, suppose the owner has traditionally taken out $3 million per year for themselves from the business profits. After succession, there might be five households, each with kids, wanting a piece of that after the owner departs.
Well, $3 million divided by five is $600,000. You can do a lot of with $600,000 per year, but not nearly as much as you can do with $3 million.
And if the business falters at all because of any of the succession problems in this article, that number will drop even further. The simple truth is, as a family grows, the business will struggle to provide the same level of wealth for each household that is connected to it.
You can mitigate some of this if you have a financial advisor on your team who specializes in protecting the wealth and growing the investments of ultra high net worth households.
At Pillar Wealth Management, that’s all we do.
We don’t work with anyone unless they have at least $5 million in liquid assets. If you want to build and sustain the lifestyle you’re used to – for all the families involved in your business succession plan – start by scheduling a free consultation with a wealth manager from Pillar.
To be 100% transparent, we published this page to help filter through the mass influx of prospects, who come to us through our website and referrals, to gain only a handful of the right types of new clients who wish to engage us.
We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.
You see, our goal is to only accept 17 new clients this year. Clients who have from $5 million to $500 million in liquid investable assets to entrust us with on a 100% fee basis. No commissions and no products for sale.
- Personalized Wealth Management – If you ask any wealth manager or financial advisor if they create customized or personalized wealth management plans…
- Brokerage Firms – The results are in from an exclusive investigation of three top investment brokerage firms…
- Business Worth – After you sell your company and collect what you hope is an eight, nine, or ten-figure payoff, you may be looking to retire, start a new company…
- Business Attractive – Before you decide to sell a business, you need to assess its readiness. How attractive will your business be to qualified and interested buyers…