It is an accepted fact that with each generational transition in any family enterprise, big or small, the odds of the company’s survival decrease. I flew in recently from Singapore, wherein despite several nudges, the three business owners I met separately (who should take the lead and inspire their families to pursue succession planning) still continued to delay the transition. Although I am used to it already, dealing with leaders who procrastinate can still be very frustrating.
Founders and leaders acknowledge the significance of going through the transition journey, but 70% or 7 out of 10 family business leaders tend to take succession planning for granted. Because of their denial that death or incapacity can come down hard on them, they make no plans for this eventuality even though such methods could avert a huge disruption that can translate to financial losses and emotional turmoil.
The reality is that no matter how healthy the leader thinks he or she is, disaster could strike at any minute. It does not necessarily have to be health-related. It can just be a freak accident. Take the case of an unfortunate event that happened to a couple in their early 60s many years ago while vacationing in Europe. After spending a few days enjoying a tour group, the founder suddenly experienced abdominal pain, severe watery diarrhea, vomiting and fever. He was severely dehydrated and found himself hospitalized. They cut short the tour, and as I write this article, he is no longer active in the business, wheelchair driven, and incapacitated. The culprit was traced to an unknown virus.
Many leaders mistakenly confuse succession planning with estate planning. That is a grievous mistake. They are two separate and interrelated transitions. One addresses management and leadership competency, and the other addresses wealth transfer, estate planning and tax management. Your will and trusts may be in order, but your succession plan may be a disaster waiting to happen.
So if you want to be fair to your children and your business, be ready not to treat them equally when transferring wealth to their generation. And if I may add, things can get even more complicated if any of the following scenarios are currently playing out in your family:
1. You have more than two kids. It can be very challenging if you have a child (or children) born out of wedlock. Do you also want them to own shares?
2. Several of your children are currently working (or have worked) in the family business. Why? It is apparent that they all have different points of view, competing expectations and interests. Do you have clear roles of entry and exit if any of them decides to move out of the business?
3. What about their spouses? It can get complicated if their spouses are also working in the family business. Would you want the in-laws to also own shares?
4. You have children that need special attention or specialized care due to certain behavioral or mental disorders or struggle with issues like substance abuse, financial mismanagement, or marital instability. Would you also want to give them shares even if they have no capacity to make objective decisions?
5. What about your parents/founders having little to no significant assets outside the company? When the entire wealth is so dependent on the family business and you have yet to initiate your succession planning, everything hangs in the balance.
6. What about a scenario where your parent/owner is in poor health, and there may be a need to rush a process?
7. Finally, what about a scenario where the family members do not get along?
The stakes are high, the consequences of a wrong decision are devastating, and as if that weren’t scary enough, the process requires you, being the founder or a second or third-generation leader, to visualize a future world where you are no longer around to make crucial decisions.