Why Business Succession Plans Fail and How to Beat the Odds
By Brad Franc, YPO Member
As a business leader, you face countless challenges in keeping your business running.
You are well-armed and experienced for most of these challenges, however, one challenge many find particularly daunting is the succession of a business. The transition can include the transfer to a family member, to a key employee or a sale to a third party.
It is a challenge, but you must eventually decide the future of your organization.
Without an effective plan for the succession, it is very likely your business will diminish or even fail altogether. Statistics show that approximately 75 percent of all businesses fail to survive past the first generation of owners. More than 85 percent fail by the third generation, and over 95 percent fail beyond that.
Why succession plans fail
While each business has its own set of unique circumstances, the reasons most succession plans fail are relatively limited. Once you pinpoint what is holding you back, you are better able to address each concern and make progress.
Conflicts inherent in your family business. Succession planning experts have researched that more than 60 percent of all failures within a family business involve the lack of trust and inability to communicate within the family.
Fear of the unknown. The succession process can evoke strong emotions, being often connected to retirement or death, which can push you into the realm of the unknown. Because the consequences of succession planning are not readily seen, you move the issue to the bottom of your to-do list.
Too long or complicated. Quite often, well-intentioned advisers will develop very sophisticated succession plans that may indeed save on taxes or provide great creditor protection. The problem occurs, however, when the plan becomes too complicated or takes too long to be implemented.
Too many advisers and too much advice. Many of you have competent legal counsel, CPAs, bankers, and financial advisers. When you meet with them, they offer sincere counsel on how and why your business should go through its succession plan. Problems arise when the advice of one professional conflicts with the advice of another or is inconsistent. In these situations, you become frustrated and might cope by just ignoring the recommendations.
No time. You may fail to begin your succession plan because you feel you can’t dedicate the time necessary to the planning process. You fear the rest of your business will suffer. According to author Stephen Covey, you should never allow the “urgent and not important” to take over the “non-urgent and important” issues facing you.
Small pool of potential successors. Many family business owners want to keep the family involved in the business. By limiting the potential candidates to family members, you have a much smaller pool of qualified candidates. Famed investor Warren Buffet once compared family succession to “choosing the 2020 Olympic team by picking the eldest son of the gold-medal winner in the 2000 Olympics.”
A single event. A common mistake is thinking the succession planning process is a single event. You might think that merely creating an estate plan is equal to creating a succession plan. It is not.
Cultural differences. Another challenge can involve two opposing cultural forces. When discussing the tensions between generations, it is often comically described as it being the job of the older generation to frustrate the younger generation and the job of the younger generation to irritate the older generation.
Fearing conflict. As the saying goes, “Anticipation is often worse than reality.” Only when you realize that conflict is a natural part of every relationship can you make genuine progress. The key is not to avoid or fear conflict, but to determine how you will deal with conflict when it arises.
Find a process to follow
Most successful businesses have unique processes for various activities in their business. In fact, it is often these unique processes that set them apart from their competition. For instance, The Four Seasons has hundreds of unique processes to improve the hotel experience they offer their customers. Likewise, Southwest Airlines has its own processes for controlling costs.
Because succession planning addresses so many issues and impacts a variety of different stakeholders, you need a process that identifies, discusses, and resolves all issues.
An analogy to consider with succession planning is that of a relay race. A relay race is not about any one person; it is about the team and following a process. Succession planning works the same way.
Expand your focus
Don’t focus on one issue. Follow a process that takes into consideration the most important concerns in order to achieve a successful transition.
As with a relay race, if you focus on one thing only, like saving taxes or keeping certain family members happy, the chance of a successful transition diminishes.
A process I like to follow begins with defining the values you adhere to in business. Because there will be conflicts along the way, you need to establish what value system you will follow to resolve those matters.
Establish a vision for your plan
What will your ultimate plan look like if you were able to achieve all your goals?
After the values and vision are established, determine where you are today. What is currently in place for your succession? To reach your vision, you need to know where you are starting from.
What’s holding you back?
The next step is to identify the roadblocks in your way and figure out what steps you need to take to overcome those obstacles. Obstacles can be a family member, a customer or key employee who might resist any change.
Once you reach this point, decide what you will want to accomplish in three years and then in 12 months.
Finally, the last step in the process is to decide on those few items each quarter you can accomplish that will move you closer to your one and three-year goals.
When you break the succession planning into smaller steps the process is much more manageable. You’ll be surprised by what you can accomplish.