While over 70% of Australian businesses are family run, did you know that only 30% survive the transition from first to second generation and just 12% making it to the third generation? In this video, I explore succession issues that affect family-run businesses, and how they can address these to ensure that they not only survive but also to grow through generations to come.
There is a distinct advantage of running a family business and it lies in its culture. There is an implicit but well established way of doing things, particularly in decision-making. In small family firms, a capable and entrepreneurial leader who makes smart decisions can bring growth and profitability to the business.
But as the family business grows, size may become an issue:
- The common belief is that the succeeding generations are ill-equipped to lead a family business because of in-fighting, lack of vision, or complacency.
- The entrepreneurial leader refuses to cede decision-making even when the business has already outgrown the leader’s ability to run it alone.
- Succession is a sensitive subject for many family
businesses,because it involves filial relationships and possibly the reluctance to let go of control.
How does one maintain entrepreneurial drive?
To maintain the entrepreneurial drive alive and strong in a family-based firm, it will be important to address these three problems. At its core, this means once should effectively, perhaps even meticulously, plan for succession.
What does succession planning involve? Succession planning should take the following 3 areas into account.
- It involves planning for training
Planning for training entails understanding what kind of skills and attitudes the next generation will need to successfully run the business. It also involves knowing how they will learn and acquire these skills. What kind of training will they need: formal education, apprenticeships, or on-the-job training? This involves understanding financial reports, understanding the market, and learning the soft skills required to successfully operate the business.
- It involves planning for structure
The complexity of handing over a business from one generation to the next depends on many factors. For example, the process of handing over the business from the first generation to the next—maybe just a parent to a child—is different from handing over a well-established family firm that has been in business for several generations.
As a business grows, structure also becomes an issue. And structure is important because structure essentially determines who makes the important decisions in the business—and how they will be made.
- Will the decisions come from one person from the top, trickled down to the front lines?
- Or will it involve a democratic process wherein all stakeholders—that is, all members of the family—will be given a voice?
- Or will the decisions be decentralized, with each member of the family assigned a particular area or unit in the business that they will be responsible for?
- It involves planning for when to hand over complete control
When do you plan to cede complete control of the business? What factors should be considered? What conditions should exist? What or who determines when the next generation is ready to take over the business?
These perhaps are the most contentious issues when a family business discusses succession planning. As a business owner, there is a sense of pride and ownership—after all, you started the business and you made it grow. At the same time, the next generation will have their ideas on how to operate the business.
However, instead of focusing on what is different—why not focus and plan for what every generation shares? The family business has a unique DNA—just as family members share a common DNA. This DNA resides in the business’s mission statement. While each generation may have a different way of running the business, this DNA will be passed on from one generation to another.
This DNA should give the older generations confidence in the next generations. Once plans have been laid—that is, the younger generation has been trained and a business structure has been put in place, the older generation may be able to decide more clearly on when to pass on the baton. Transition, after all, is not a question of if, but of when.
If you are interested to know more about what a business has to go through when facing exponential growth, you can download the first chapter of the book, ”$20K to $20 Million in 2 Years” absolutely free here. The chapter talks about the differences between a good and a great business and puts out questions that make you consider how you can turn your business from good to great.