Lansberg (1988) describes succession planning as the process of making the preparations necessary to ensure family harmony and continuity of the business through to subsequent generations, emphasising that these preparations relate to the future needs of both the business and the family.
Given that the average age of family business owners is 55 years, succession planning is becoming a critically important issue for families in business with 84% of incumbent CEOs planning to retire over the next ten years, and 54% in the next 5 years.
Succession planning is regarded as important but rarely documented
Family business owners do NOT appear to see a need for a documented succession plan that is agreed by relevant family members. A significant majority of family business owners (78.5%) indicate that they regard succession planning as important (74% for first, 89% for second, and 100% for third-to-fifth generation family businesses).
Yet, most of them also report that they have NOT documented either a succession plan for the future management of the business (80.3%) or for the future ownership of the business (75.2%).
Most of those who report that plans are documented also report that they are not implemented (Table 17.1).
Lansberg (1999) has argued that it would be both wasteful and ineffective to plan for the future of a family business without first addressing the needs and aspirations of family members involved. Along the same lines, Lievens (2005) noted that development of viable long-term strategies for the family business requires current and future shareholders not only to pull in the same direction but also have the same ownership vision.
However, few people outside the family are aware of the contents of succession plans. Surprisingly, 22.3% indicate that no one (other than the owner) is aware of the content of the plans. Table 17.2 shows the extent to which the listed groups of people are aware of the content of succession plans.
Business transfer
Family succession is the most likely form of transferring equity for 45.4% of family business owners (34% for first, 60% for second, and 90% for third-to-fifth generation family businesses). This type of transfer is followed by trade sale (25.3%) and sale to non-family managers (22.5%).
A greater percentage of first generation family businesses (30%) indicate a likely sale to non-family managers than second generation (8%); or third-to-fifth generation businesses (5%). Over 44% of family business owners indicate that transfer of equity to family members will be through the execution of wills.
About 53% report likely transfers of equity during the owner's lifetime, with 28.4% wanting the next generation to pay for the equity (i.e. a sale), while 24.6% are prepared to gift the equity to family members. On average, owners indicate that the transfer is likely to take place in 7.6 years.
Ownership succession
As indicated above, only 25% of family business owners have a documented ownership succession plan with 23.9% indicating that it is implemented (Table 17.1).
Management succession
As shown in Table 17.1, only 17.8% of first generation, 22.6% of second, and 26.3% of third-to-fifth generation owners indicate that they have a documented management succession plan. Of these only 10.4% of first, 29% of second owners, and 30.8% of third-to-fifth generation owners note that they have implemented their management succession plans.
Similarly, only 35% note that the family has agreed upon the succession plans and succession of the next CEO (29% for first, 42% for second, and 68% for third-to-fifth generation family businesses).
On average, family business CEOs plan to retire in approximately 7 years. In 54.3% of family businesses, the current CEO is likely to be succeeded by a non-family member (63.1% for first, 41.2% for second, and 21.1% for third-to-fifth generation family businesses). In the 45.7% of family businesses where the current CEO is likely to be succeeded by a family member, it is most likely to be the son(s) of the owner.
Sons and daughters
More sons are involved in the day-to-day running of family firms (30%) compared to daughters (5%). It would also appear that sons are over ten times (74.9%) more likely than daughters (7.2%) to take over the helm from the current CEO.
Davis and Tagiuri (1989) indicated that father-son dyads are the most typical type of family pair found in family companies, and that they work together with varying degrees of happiness and success. Similarly, Dumas (1989) reported that fathers generally desire that their son(s) will eventually take over the management of the family firm, and that daughters are not usually regarded by their fathers (and often do not see themselves) as potential successors unless a crisis forces a re-evaluation of the situation.
The relative invisibility of daughters in family business succession was also confirmed by Vera and Dean (2005).
Business continuity planning and exit readiness
It is noteworthy that 50% of owners believe that their businesses are NOT exit or succession ready, although 84% would like them to be. This is a more clearly indicative assessment by owners of their lack of preparedness to exit their businesses than the lack of documented succession plans, since it is a relatively unambiguous statement that applies equally to succession and sale of the family business.
Younger generation family members
Of some concern is the finding that approximately 57% of family business owners indicate that younger generation family members are NOT as interested in the business as the older generation (64% for first, 41% for second, and 44% for third-to-fifth generations family businesses). In our study of succession matters (Romano, Smyrnios, & Dana, 2000) we identified that integrity and commitment to the business are the two successor characteristics most valued by family business owners and successors.
According to Sharma et al. (2003) both the feasibility (evidenced by the availability of a willing and trusted successor) and the desirability (as evidenced by an incumbent's desire to keep the business in the family) of succession are critical factors in the succession process.
Family Business incumbents are invariably either members of the Silent Generation (born before 1946) or the live-to-work Baby Boomer Generation (born 1946-64).Younger generation family members are either the work-to-live Generation X (born 1965-77) grandchildren or children respectively, or their more optimistic and technologically savvier Generation Y (born 1978-87) younger siblings.
Much has been written about the differences in upbringing, outlook, attitude, and behaviour between these generations that need to be considered by those who are planning the future of their businesses.
We are led to the conclusion that members of the younger generation can be at least as entrepreneurial as their parents or grandparents. However, they generally prefer to work on their own terms and are, therefore, just as likely to want to start their own business or acquire a business, as they are to become willing and able family business successors.
Succession resistance
Conspiracy or paradox?
Although succession planning is critical for the continuity of the family business, the process appears to be resisted, avoided, neglected, or deferred by a substantial number of family business owners. Notwithstanding the fact that owners (and other family members) invariably indicate that they regard succession planning as important, they do not appear to treat it as a priority; and doing nothing, or leaving it to chance, are often the solutions adopted (Dumas 1996). This has aptly been referred to by Lansberg (1988) as the succession conspiracy, and by Sharma et al. (1996) as the succession paradox.
When it comes to succession and succession planning in the family business, why is there an apparent contradiction between what is said and done?
Could the answer lie in what Ward (2005) refers to as the unconventional wisdom of families in business? Ward argues that culture, strategy, governance, and succession are different in family enterprises and that, as a result, they require a different set of insights from the conventional management wisdom that applies to non-family firms.
According to Ward, blending family and business creates many contradictions that successful business owning families reconcile by the use of counterintuitive thinking and unconventional insight and actions. He emphasises that harnessing the differences is what makes the family business an enterprise with a special DNA for distinct competitive advantage rather than the less-than-optimal organisational form believed by many.
Concerns for the future
Overall, 44.8% of family business owners report having concerns for the future of their businesses compared with 69.2% in the 2003. In both reports, concerns relate primarily to the financial performance of their businesses (30.5%) and to industry-wide problems (21.2%).
As shown in Table 17.3, a smaller percentage of owners list the following factors as concerns: selection of a successor (9.3%); lack of family interest (7.6%); and family turmoil (5.1%).
