Planning Helps Put the Success in Succession

Think of transferring your family business to the next generation as a process, one that benefits from having a tangible success plan in place — instead of just having one in mind.


By Cynthia Lescalleet

Having a defined succession plan in place for a closely held family business can improve the chances that the transfer of ownership or man­agement to the next generation will be a smooth and successful one.

In his work as a succession-planning specialist, attorney, former CPA and YPO member Brad Franc of Houston Harbaugh cites some daunt­ing statistics on the transfer success rate: Less than 30 percent of family businesses survive changing hands between the first and second generations. The rate drops to 10 percent by the third generation and declines to 3 percent by the fourth generation.

Additionally, of the 80 percent of business owners who intend to transfer their company to the next generation, only 30 percent do so, he says. Of the 30 percent who do, however, 84 percent succeed — when they have a plan.

“What those statistics tell us is that a business owner can dramatically improve the chances of a successful succession by developing a plan,” says Franc, who deploys a planning system he developed, called “The Succession Solution.”

Given these transfer success rates, he suggests it is little wonder that YPO members responded a bit anx­iously about their succession planning efforts (and avoidance) in an informal, international poll he conducted in 2013 as part of research for his pend­ing book, also entitled “The Success Solution.” Franc says his member survey found that owner-managers know they need to plan. Most even want to plan. They just do not know how to develop the plan or, more often, how to get the plan they carry in their heads into something tangible in writing.

The primary reasons businesses don’t make it into the next generation are the failure to plan or identify a transition process and the failure to acknowl­edge and address family dynamics, he explains. “It is dangerous to only focus on the business needs and ignore the family emotions. If not properly addressed and managed, the most successful busi­ness can be destroyed by family rivals.”


Fear-based myths can be impediments to succes­sion planning, he says. For example, some owners perceive that developing a succession plan will mean a loss of control. However, a succession plan can express how control will be handled during and beyond the transition period, he says. A plan’s long-term guidance can be particularly important when retirement income is on the line, as is often the case with closely held family businesses that typically are coupled by the personal guarantee of the patriarch or matriarch.

Another myth is that the process is complicated. “It’s not. But you can’t do it overnight,” Franc cau­tions. There is neither a “magic wand” nor a single process that nets the optimal outcome for all com­panies, he adds. “It is not a particular plan that is important but rather the process itself that nets suc­cessful outcomes.”

The planning process can feel a little like learning a foreign language, he says. Just acknowledge that the succession exercise is a new area to master. This can be challenging for those who have been running their own company or family business and never had developed such a plan.

“Succession planning is just another skill set,” he says, and once learned, skills need to be shared. “If you teach generation two how you did it, it will be that much easier for them to tell generation three.”

Assess, ask, assign and take action

Franc’s succession-planning considerations include:

  • Determine who will be part of the planning process. Attendance by family members of all generations also can serve as a training exercise for subsequent succession. The team approach also might include key professional advisors to assess the financial and legal issues and ramifications.
  • Identify personal and business risks and determine ways to resolve or mitigate them. One risk exam­ple occurs when the bulk of customers have been cultivated and served by the departing patriarch or matriarch. Another risk example is a company’s debt structure. If there’s a change of control provi­sion, a bank can call in a note after the transition. Anecdotally, Franc recalls owner-clients who have emphatically denied this provision is part of their finances — until they review their paperwork.
  • Identify the strengths the business retains. For instance, if a business has strong non-family man­agement in place, the business owners may want to have the next generation train under existing man­agement to evaluate and assess their skill sets.
  • Know each family member’s interest and intent. “If the next generation is not interested in running the company, it’s better to know that sooner rather than later,” he says.

Similarly, if the company will be passing to one family member and not another, any conflict should be addressed before the transfer. “People might be upset with an outcome,” he says. “They are more upset by not knowing what to expect.”

In other words, ignorance and surprise are not OK. Franc has observed that many of his client-own­ers carry a plan in their heads but don’t want to share it, for a variety of reasons, such as not wanting to offend someone or wanting to be able to change his or her mind. However, this uncertainty often proves more damaging than setting forth a plan, he says. “You need everyone pointing north.”

Running the business and building the business already keep owners and managers fully engaged. Finding time for succession planning, however, is imperative to secure the company’s legacy and longevity, Franc says.

Fortunately, many of the pieces of the planning process may already be in place. For instance, most business owners have developed shareholder agree­ments, bylaws or estate plans that begin to lay the foundation for a succession plan. “Many business owners don’t realize it, but these documents can dra­matically impact a succession plan,” he says.

A completed plan, properly executed, gives the business as well as the next generation assurance they can successfully take up the reins, Franc says. “Treat the succession plan similar to a strategic plan,” but go easy on both. “A 40-page plan doesn’t get done.”