CLIFF PLANNING?
ARE YOU JUMPING TOO?
By
Wide awake in the dead of night, Max doesn't feel like a
statistic. His fears seem all too personal: What will I do when I'm not going
to work every day? What will the company do? Those kids think they know it all
-- how will they get along without me? What if they get along fine? What if the
business fails? Or worse, what if it does better than ever?
The fact is that Max is just one of thousands of
baby-boomer and older entrepreneurs now starting to face the reality of
retirement. The company he built up from nothing is one of the 53 percent of
family-run companies in the
According to research cited in the current issue of Harvard Business Review, most family
businesses are inadequately prepared for succession. Of the 3000 companies
surveyed, 66 percent have no written strategic plan, and 42 percent expect
family members to share future leadership -- "a notoriously fragile and
difficult way to run a company," says Ross Nager
of the
The irony, Nager points out, is
that family businesses have an even greater need for succession planning than
do public businesses. "CEOs of family businesses typically serve six times
longer than their counterparts in public companies," the article states.
"That length of tenure makes the impact of change, when it comes,
enormous." The unique capital needs of family businesses and financial
demands of heirs also make planning more critical.
The Wall Street
Journal estimates that assets of $3 trillion will be passed on to the next
generation of American entrepreneurs in the coming decade -- one of the
greatest transfers of wealth in history. Yet too small a share of this wealth
will stay in the family. Among family businesses, only a third traditionally survive to the second generation, and only half of these are
passed down to the grandkids.
The failure of family businesses is most often traced to a
lack of succession planning. Considering the enormous stakes, these
entrepreneurs' reluctance to plan for succession could prove to be a major
destabilizing factor in
What makes family business owners so unwilling to face the
inevitable? Deep-down dead-of-night fears can be hard to articulate, but
entrepreneurs frequently express a whole list of more rational-sounding
tensions and anxieties to professionals, like us, specializing in family
business succession planning.
These business owners worry that their retirement will
bring simmering conflicts to the boil, or even create conflicts between
siblings or other family members, majority and minority owners, or family and
non-family owners and/or managers. Everyone has a different definition of
what's fair, but as long as the founder is still in charge, these don't have to
come into play.
Often the dynamics are complicated by a history of
successive marriages and offspring of both founders and heirs. Questions of
estate taxes and liquidity are easier not to think about. Founders want to do
the right thing by their children, but they also want to place the business in
capable hands. When they've put their whole lives into the business, breaking
away seems next to impossible, so they hang around, unable to stay and
unwilling to leave.
Succession planning is an issue of leadership, perhaps the
most important one a business owner will ever face. Good succession planning
doesn't just happen. When the leader has failed to provide direction,
neglecting to make the fundamental choices that will guide the process of
succession, the result is something we call "cliff planning." In
other words, do nothing until there's a crisis, then
figure out how to rescue the business while everyone is in crisis mode.
Not only is this type of planning reactive and impulsive,
it's also expensive. The business may survive, stakeholder relationships may
even survive, but one thing's for sure: the government will walk away with the
money.
There is a better way, a proven process we have developed
for succession planning in family businesses. All of the arguments for engaging
in this process come down to just two good reasons.
First, the more lead-time is allowed before the event of
succession, the more money will be left to the family. The business will fare
better, too, but as a family business owner the founder can be sure that
everything possible has been done to ensure the family's security and
well-being.
Second, the challenge of taking charge of succession is a
true test of leadership for a family business owner. The renowned contemporary
business writer Peter Drucker refers to succession
planning as a leader's "final test of greatness."
When you've devoted your life to solving the problems of
your family business, the prospective loss of personal identity involved in
leaving it can be frightening. But this is the most important problem you'll
ever solve.
As we've often heard recently, the Chinese word for
"change" means both "danger" and "opportunity."
The fears that Max and other family business owners feel as they face retirement
may represent opportunities as exciting as any in their careers. Taking charge
of the succession process is the greatest legacy you can leave to your business
and your family.