Why Do Family Businesses Fail at Succession Planning?

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A majority of family-owned businesses fail to transition because of lack of communication and trust. This can be avoided with proper succession planning and help from a team of advisors.

Family-owned businesses represent more than 90% of all enterprises in the United States. Of those, 30% are second-generation businesses, 12% are third-generation businesses and 3% are fourth-generation businesses. Of the 70% of family-owned businesses that fail to transition, 60% fail due to communication problems and lack of trust, while another 25% fail to transition due to lack of preparation of the next generation.

K·Coe Isom: Transition Navigator from K·Coe Isom on Vimeo.

According to a Financial Planning Association/CNBC study released in 2015, 78% of small business owners plan to sell their business to fund their retirement, but less than 30% have a written succession plan. The survey also found more than half of small business owners sell their businesses to employees or family members.

Related Read: How Business Owners Can Avoid Costly Mistakes

Of the senior generation, 80% want the business to stay in the family but 20% of them are not confident in the next generation. These facts underscore the importance of educating and training the next generation of leaders to step into the gap. It starts with encouraging a greater sense of psychological ownership in the business. It is critical to start treating the next generation like owners before they take over the company. Where is the business headed and what role does the next generation intend to play? Have you given them the tools they need to succeed and relevant decision-making ability? What are you doing now to prepare them for ownership later?

Then think about the actual transaction. Are you clear about what you need to get from the business to be financially sound? How will you value the business? What mechanism will you use to sell or gift the business to the next generation? Talk to your advisors about potential strategies that will maximize value and minimize tax liability.

Related Read: 5 Reasons Why Transition Plans Matter Now

These are some of the questions that must be answered for you to chart a course toward business succession. The best strategy is to start early, no less than five to seven years out from your planned exit from the business.

It is not uncommon for there to be tension between children, long-time employees and the senior generation as you go through this process. It is important to manage this conflict by identifying it, determining its source and communicating about it. Communication is the hallmark of an effective succession plan.

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The University of North Carolina at Asheville (June 2008)

FPA/CNBC (April 2015)

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