Family businesses are on the threshold of a historic transition.  As of a 2007 study, the median age of top executives in family businesses was 50 years old and 40% of them expected to retire by 2017.  Baby Boomer owners are relinquishing the reins of their companies.

So you would expect businesses everywhere to have succession plans in place or to be deep into the planning process.  Yet, a recent PriceWaterhouseCoopers (PwC) study  revealed that nearly two-thirds of family businesses have not chosen a successor while 73% “admit to not having a documented and robust succession plan in place for senior [management] roles.”  Given all that has been written about the benefits of having a succession plan (including previous blogs here), the question is:  What is holding business owners back from creating succession plans?

Why would I do this to my child?  In one business I worked with, the son was perplexed why his father never discussed the company’s future.  With a little probing, the father blurted out: “Why would I ever do this to my son?”  The father told me he didn’t see a future for the business.  He also shared how he, a second generation business owner, never enjoyed working with his own father.  The thing is, he never told any of this to his son who had already joined the business with the full intent of continuing it into a third generation.

Awkward Conversations.  This story of the father not talking with his son is just one example of the many awkward conversations owners are trying to avoid.  Others include:  Telling your child it will take longer to hand over management of the company because they are “not ready yet”.  Telling one child they are being passed over for leadership in favor of their (usually younger) sibling or (even worse) someone from outside the family.  Making it known you are planning on selling the business so you can “cash-out”.  These are uncomfortable, awkward conversations anyone would want to avoid.

Retirement Funding.  Toronto’s The Globe and Mail recently published an enlightening article on this subject.  It notes that successful companies reinvest most, if not all, of their earnings back into the business.  This leaves only two alternatives to fund the older generation’s retirement:  Taking “substantial funds” out of the company or having them receive pay from the business whether they continue to work in it or not.  Either option puts a strain on the business even possibly putting it at risk.

“Sticky Baton” Syndrome. The PwC study coined this expression for the 40% of business leaders who plan to maintain control even after ostensibly handing over management to the next generation.  The reason given by one company leader:  “It’s the most difficult thing to do, trying to figure out if the next generation is capable of running the business.”

But the business would fail without me. We all know this business owner. He or she is so involved and attached to their business that there is almost no difference between the person and the business.  They have dedicated their life to growing the business and now much, if not all, of their persona is that business. For them, considering transitioning management to anyone else would be like thinking about cutting off their own leg, or worse.

The Solution. A well designed succession planning process directly addresses these concerns.  The first step:  Having those “awkward conversations” in a manner where all are heard and their problems addressed.  For instance, when a child has to wait longer for the transition or watch as someone else takes leadership, the conversation starts with coming to an understanding on the goals for both the business and the family.  The result may still leave some bruised egos but the decision is easier to accept once a direction is set and all are included in this conversation.

Another key component of the planning process focuses on the “loss of control” feeling which is at the root of the latter three issues cited above.  A successful succession planning process provides all involved with the comfort of being in control of their future.   This process considers how much the retiring owner will need to finance their future and how that will be attained without draining the company.  For the “sticky baton” owner, the succession plan evaluates the skill set of the incoming generation and puts in place a schedule for developing the future leader, including a time-frame for the eventual succession.

For the owner whose persona is inseparable from the business, the planning process begins by understanding the inevitable.  This leaves them with the choice between controlling how and when the leadership transition unfolds or leaving the future of their company to fate.

And whatever happened to the company where the father didn’t see a future for their company?  Through the succession planning process, the son laid out a viable future for their company which took advantage of changing technologies.  I am happy to report both father and son are moving ahead with the succession plan and the company is thriving.

Have you started working on your succession plan?  What prompted you to begin?