Part I: It Took A Lifetime to Build Your Business – But This One Mistake Can Erase It All
This country has the family run business to thank for representing over 90% of all American businesses. Few would dispute, these businesses are the backbone of our US economy contributing over 50% of the GDP. 30% of family run businesses are passed on to the 2nd generation, and 12% are passed to the 3rd generation. Both are significant milestones to be applauded, but it’s the other side of the story that deserves a second look – 70% do not remain in the family. Interestingly, the significant reversal is not from a lack of desire. Over 69% of recently surveyed family business owners indicated they plan to pass the business to another family member.
If the business won’t remain in the family, what will happen when it’s time to transition? There’s two choices; the business is sold to a non-family member or it simply closes the doors. 70% is a sobering statistic when you consider the lifetime of sweat equity it took to build the business from the ground up, and then the fortitude to last over 30 or more years. Many theorize the primary driver behind this trend is the lack of a transition plan. The theory may be very close to the truth as more than 70% of family run businesses do not have a robust transition plan. The numbers seem eerily aligned to one another.
-  Charles D. Fox IV, Keeping it in the Family: Business Succession Planning, SS039 A.L.I.- A.B.A.2009, 2013 (2011).
Coincidence or Cause?
70% of family owned businesses do not transition to another family member
70% of family owned businesses haven’t developed a transition plan
Understanding why family run businesses seem to avoid developing a transition plan may be rooted in the lack of clarity behind the purpose, sometimes referred to as a succession or an exit plan. Concise descriptors which are frequently used as synonyms that can be swapped out for one another. However, each is uniquely different from the other: An exit plan and/or strategy considers what will happen with our employees which are typically made up of other family members at the time ownership is relinquished – what will happen to them? Whereas a succession plan, is a step by step, and actionable plan that provides the critical instructions of what a business needs to do in order to transition (exit) the ownership of a business. Stated more succinctly:
“A succession plan is a roadmap to the exit of a business.”
If you have the time, or inclination, to follow the many research studies, there seems to be a long laundry list of reasons for procrastinating or completely avoiding the decision. The value of identifying your own excuse, will help you arrive at the primary underlying cause:
It’s too time consuming and too complicated.
It’s a natural assumption that anything that appears to be complicated will typically take too much time. The excuse might be another way of saying “it’s complicated, because I don’t understand what exactly needs to be done”; absent any knowledge, the delay will remain justified. This excuse assumes there’s not a viable alternative to attaining the knowledge.
We haven’t found the right person to backfill and take over.
It’s human nature to believe it’s nearly impossible that anyone would be able to replace or backfill what has taken you a lifetime to build. There’s so many operational nuances and complexities that are unique to your business. For each potential candidate found, there’s probably a list of reasons which lead you to believe they simply can’t run the business the way you do. This is a fairly common excuse, and it’s also a convenient way to justify the decision until there’s a moment of acceptance - we’re all replaceable.
We’re a small business, we don’t have a need for anything formal.
The translation for this excuse seems to translate to “our business isn’t complicated” or “we only have a few employees”. The complexity of a business is usually in the eyes of the beholder. Successful business owners typically know their business from every operational aspect – hence, the business in their perspective isn’t complicated. But regardless of the true operational nature, a succession plan is agnostic when it comes to they type of business- the purpose is to have a clearly defined step by step plan that includes each employee and all aspects of the business from legal to finance. In the later scenario, the size of the business only becomes a legitimate fallback position if you’re an independent owner providing professional services, such as an accountant.
I don’t want to compromise the employment of other family members.
There’s a saying that was coined by Franklin D. Roosevelt – “The only thing we have to fear, is fear itself”. If this is the concern, this should also be the business owner’s motivation to take action – quickly.
Excuses for delaying a transition plan are plentiful, but most roll-up to one of the four we’ve outlined. Typically, the most challenging step is to simply have the conscious awareness that regardless of the justification - an excuse doesn’t replace the “need”, it’s simply a means to delay.
For the skeptics - 5 proof points it’s time to plan for succession
With nearly 70% of businesses operating without a transition or succession plan, possibly you’re a business owner requiring tangible evidence there are true indicators that should help you make a material shift:
- The “get-up-and-go” feeling you used to get when you wake up in the morning, is half what it used to be.
- The company hasn’t seen new growth in over 2 years.
- New competitors are introducing new and innovative ideas, but you’re not capitalizing on the new trends.
- Your competition is raiding your sales people or other critical non-family resources.
- Your family isn’t interested in acquiring the business.
Succession planning is one of the most critical pieces of running a business, of any size, and any industry. As an owner, you don’t need to be the expert, but you do need to find the right resources with the expertise to support your unique business. The best time to put a succession plan into place is the day you opened your doors, but it’s never too late to take the next steps – identifying which solutions will best fulfill the vision you have for your business. The time and sweat equity you and your family members have dedicated to building the business are your most valuable assets. Having a succession plan will protect your financial and emotional investment.
This is a three-part series – in our upcoming second article we will walk through the various solutions to help you begin the process of determining the best path(s) for your organization. If you want to learn more about the process of developing a succession plan, let’s connect and discuss your unique business – Jbelford@FocalPointCoaching.com