Survival of a Family Business: Need For Succession Plan

More than 80 percent of all businesses in the United States as well as throughout the world are family owned. And, unfortunately, most of them -- some 65 percent -- never survive beyond the founding generation.

Those facts were reported to a group of owners of family businesses at a BDO Seidman, LLP seminar held at the Chicago-based amounting and consulting firm's national headquarters by the husband and wife team of Edwin A. Hoover, Ph.D., and Colette Lombard Hoover, M.S. They serve as a family business relationship and management resource for the international firm.

The Hoovers warned that family businesses don't survive primarily because the founders and those who hope to succeed them cannot agree on four key relationship areas: needs and interests of the business; changes in family members' expectations and commitments; problems in communication; and lack of adequate business continuity, succession and retirement planning.

"In short, too many families fail to separate their family needs from business management needs and ownership needs," said the Hoovers. "In a pure business, the needs of the individual are subordinate to the corporate goal. However, in family businesses, the needs of individuals many times overcome the needs of the business -- leading to family trouble."

The typical CEO of a publicly held company stays in his job an average of five to seven years, opening up executive opportunities for younger people. But, the heads of family-owned businesses usually stay in their position a lot longer while junior executive managers -- most often founders' children, siblings and/or cousins of the third generation -- languish until the senior family member finally does move aside. This creates tensions not only on the job, but within the family as well, said the BDO Seidman consultants.

What the Hoovers suggest is that family-business owners take a long look at their own needs, their family needs and their business needs -- and begin preparations early for succession "or else their company won't last into the second generation. By the time a company dips down to third generation, family members, ownership and individual needs can be so fragmented and diluted that there never can be agreement among the members," and for certain a company will dissolve.

Some areas where the needs of the family and the business are in misalignment, according to the Hoovers, include:

• Family member owners want to take more income out of a business that really requires new equipment and funding for growth.
• Family members opt for employment versus the business' needs to fill only the positions required.
• Younger management wants to take the company in a new direction while the entrenched senior owners want to maintain the status quo.

Family businesses can endure if members can align the following principles, say the Hoovers:

• The business should provide career opportunities for family members who are ready and able to take advantage of them.
• Family members understand that ownership must be purchased at a fair price and a willingness of current owners to sell their interests.
• Family members agree to develop clear guidelines for family involvement and the business' need to professionalize its employment and management systems.

The Hoovers advised potential family business successors that they assume responsibility for their own development as leaders and future owners.

• Step 1 -- Learn to speak so your parents can hear you. Try first to understand, then to be understood. Understand your parents' needs, expectations, fears and aspirations, and articulate your own.
• Step 2 -- Believe in yourself and seek to learn all you can about the business.
• Step 3 -- Nurture your own deep and abiding sense of "emotional ownership" of the business. Show that you do know what responsibility, accountability and leadership mean. This will help your parents feel more confident in your ability to take care of the business -- their "adopted child."
• Step 4 -- Find a mentor who can serve as a trusted guide. Identify other business leaders, especially family business leaders whom you admire, and aspire to emulate those characteristics which make them successful.
• Step 5 -- Interact and learn from other successors like yourself. Share common issues and concerns with others who understand the challenges of family business leadership who will provide both support and encouragement.

"Successors must face two major challenges," said the Hoovers. "First, they must develop the broad-based business acumen needed to work in an ever-changing business environment, while gaining the respect of customers, employees, and other business associates. Secondly, successors must be sensitive to family members' concerns and be able to gain their respect. They must be able to use family history as a base for learning rather than 'emotional baggage'."

The latter requires developing professional relationships with siblings and learning how to merge the differing goals and values of individual family members in the business.

"Too often," the Hoovers continued, "successors are preparing for a job that doesn't yet exist and in a business climate that is constantly changing. Often the only role model they have is the entrepreneur/founder who runs the business in a somewhat single-handed manner. These self-made entrepreneurs usually say they want to keep the business in the family, but they are often lost as to how to begin passing on the business acumen needed for future ownership."

Family business succession takes planning and that encompasses taking a good, hard and realistic look at where your business is today and where you see it being in the future. Then you must agree to take the necessary steps to get you there, they said.

Planning may be done informally or formally, they say. But, the family needs a Family Council which consists of all family members, active and non- active, who have an interest in the business. It should meet at least twice a year, elect a chair who should guide the development of a family mission statement and family participation plan.

The Council should provide communication linkage between the family and business by being a place where business issues, as they relate to the family, are discussed.

"Without the Family Council, family issues have no outlet except to filter out through the business in unexpected and often destructive ways," they said.

Dr. Edwin A. Hoover is a consultant and mentor to family businesses. His consulting work focuses on management and ownership succession, setting and reaching common goals, managing conflicts and figuring out how family members can best work together.

Colette Lombard Hoover is a specialist in organizational behavior and family systems psychology. Her family-owned commercial construction company, based in Chicago, is now in its third generation of family ownership and management.