Why, when family owned and run businesses out-perform their non-family competitors, do very few succeed after the reins are passed to the next generation?

Contrary to popular belief, a number of empirical studies have found that family businesses perform better than non-family businesses. In fact, ongoing research has shown that family businesses don’t only outperform non-family run competitors but they are also better managed.

Regardless of its size, the family business shares a number of significant qualities that bring special benefits to the community and economy in which they operate. For example, they tend to be more labour intensive and less capital intensive which results in a higher capacity for job creation with less employment volatility. Another benefit of the family structure is that innovation can be achieved at relatively lower costs, drawing on internal sources of capital and re-investment of profits and because they foster entrepreneurial instinct at the family level they often act as incubators for new companies. Family businesses are also able to take a longer-term view of their strategy and are less concerned with short-term shareholder value, which holds them in good stead during tough economic times.

But despite all of these positive characteristics, a survey of 800 heirs of recently failed family controlled companies showed that the death of the founder precipitated the crisis in more that 75% of the cases.

Succession planning for success

So what is the missing link that ensures ongoing success for the family run business? While the answer is not as easy as one would hope, succession planning is a critical factor to the future success of these businesses. It is the ultimate challenge of the founding family’s ability to ensure continuity of their business into the next generation, and achieving the goal of collaborative harmonious family relationships.

Change, and in particular succession, is driven by the biological clock. In addition, factors such as leadership, management and departure or exit style of the founder, the size of the business, its structures and conflict management procedures all impact on the succession process.

Succession planning in family businesses is a journey and a deliberate process. It must address both the transfer of business ownership and management continuity.

Dad doesn’t always know best

Some of the key characteristics of the family businesses structure that usually need to be modified to allow a smooth and successful generational transition include:

• A highly centralised decision-making system;
• An over-dependence on one or two key individuals for its survival and growth;
• An inadequate repertoire of managerial skills and training;
• A paternalistic atmosphere.

Family factors are absolutely critical in developing an effective succession plan for the family and their business. The complexity and enormity of issues to be solved are often too overwhelming for the founder or incumbent so they immerse themselves in the day-to-day activities and tasks of the family business, rather than tackling succession and other related issues heads-on.

Rather than thinking that what was painstakingly created may be difficult to pass on to others, the family should be considering some of these important questions:

• Can this business be sustained beyond the current generation?
• Do members of the next generation want to continue their involvement with the family business? If so, do they have the commitment, ability and will to take the business to the next level?
• Can the current generation let go and hand over the baton?
• Most important is to articulate the succession plan and timetable.

It’s not a sprint for the finish

Succession planning is not an overnight event, but a deliberate and well-thought-out process over a period of ten to fifteen years. The planning process should ideally be seriously underway by the time the business leader is in his or her late forties or early fifties, and the children in their mid to late twenties. It’s important to remember that it is never too early to start the succession planning process.