The more than 10 million family-owned businesses in America are a major economic force, paying an estimated 65% of all wages and accounting for 50% of the gross national product.
One of the greatest challenges they face is succession--who will lead them into the next century. Statistics show that fewer than 30% of all family businesses make it to the second generation and only 13% to the third generation.
The Times talked with Dr. Craig E. Aronoff, founder and director of the Family Enterprise Center at Kennesaw State University in Marietta, Ga., and chief executive of Family Business Consulting Group. He is also executive editor of the Family Business Advisor newsletter, a joint venture with the Arthur Andersen Center for Family Business.
Q: Why worry about succession?
A: Taking the attitude "When I die my heirs will just have to take care of the problem" is a very dangerous approach. The heirs may or may not be prepared to run the business and are likely to have different ideas about what should be done with the assets and therefore a conflict is likely.
Businesses are tenuous things. If your family is out squabbling about what is going to be done with this asset, the business is going to suffer.
What's more important than selecting a successor, however, is understanding the process by which one will be selected. There needs to be an understanding about how the family is going to decide what to do with this asset. If you care about your family and you have been working hard all your life to provide for them through this business, then you need to pay some attention to what is going to happen after you're gone.
Q: Does "succession" refer strictly to when a business owner dies, or can it also apply to retirement of the older generation?
A: One would hope that there are clear plans for succession and that those plans would not hinge on someone's death, particularly if there is incapacity before death. In that case, the business is likely to be injured by the declining abilities of the person who is running it. We would hope that there would be an enjoyable period of retirement too. However, people who found businesses sometimes don't want to retire. A recent study [Arthur Andersen's American Family Business Survey] suggests that between a quarter and a third of leaders of family businesses either don't intend to retire or plan to remain involved in some capacity in the business throughout their lives. That [heightens] the need for succession planning.
A: There are several challenges that confront a family business at the time of generational succession. One is financial--how to support the elder generations in retirement; how to sustain enough funds to continue to run the business; the need for one or more children in the business to be able to take enough money out of the business to support their lifestyles; and the need to plan for estate taxes.
Another challenge is strategic or managerial: What's worked for the last generation probably won't work for the next generation. The world has changed; the market has changed; there's new competition; and there is a need to develop new strategies. The older generation very likely wants to continue doing what they've been doing. The younger generation will want to do things new ways and there are going to be extreme conflicts about the direction of the business.
In that scenario, strategic planning should include being clear about who has what role and who can make what decisions. It takes a lot of planning, a lot of sensitive desire to make this work across generations.
The final challenge is family. All that's happening in the business is probably having intense emotional echoes in the family, particularly if several members are being considered for leadership.
Q: Does it make a difference if you're talking about a large or small business?
A: Probably not. We find the issues depend on how many generations the business has been in a family. With more stockholders and more cousins involved instead of just the nuclear family, the issues are different.
Q: What's the first step to succession planning?
A: To understand the goals and objectives of all the members of the family. The founder and spouse need to sit down and ask, "What are our hopes and dreams relative to the business?" And then they need to have a discussion with their children and perhaps any non-family executives about their goals and aspirations. What do they hope the future will look like? To what extent can they envision a future that they are all excited about and what are some ways to get there?
Then you ask the question, "How do we achieve our goals?" The answer can take many forms. A child might need a broader education to successfully direct a business given new competition, or a child may need experience in another business setting.
Q: What's next?