Your Money

Your Money: Take steps early for success in passing family business to next generation

Family business expertJune 22, 2014 

Henry Hutcheson

Historical statistics show that only about 33 percent of family businesses succeed from one generation to the next. However, only about 85 percent of family business owners believe that their business will remain family owned.

Clearly there is a discrepancy.

The root causes of this disconnect lie somewhere between a lack of awareness or willingness to address the issue, or a lack of understanding on how to address it. Nonetheless, the end result is that no action occurs to prepare the business to pass on to the next generation.

I have seen this many times working with family business, typically when I am brought in by the next generation. They see that the owner is starting to fade, maybe is not performing at the same level as they had in the past, and may not be coming into the office as much. However, it can also simply be that the owner is reaching a significant age, but has not relinquished any part of the leadership reins.

When you ask these owners about their plans, it is typically quite trite: “I am just going to pass it on to my kids when I die.” Or, “Things will work out, and when I am ready to retire I’ll just hand it over to my sons.”

This methodology is referred to as the Monarch Exit Plan: King dies, Prince takes over. Not only does this impact the broader family and key employees, but when the heir hits the throne, he or she has little to no experience being the final decision maker. And now there is no one around who either understands the issues or there is someone who has no vested interest.

Bob Matthews, owner of Fargo, N.D.-based Mr. Spindle, puts it this way: “It is hard being a business owner; you can’t discuss your issues with your employees as they have a vested interest in the outcome, and may panic if they thought you were unclear on the exact direction you were going in. You have to keep your game face on at all times.”

The answer to all of this, or at least the first big step, is to put forth some effort in laying the groundwork to have the business pass to the next generation. It is estimated that those who put forth some effort and get help and education increase their success rate by over 70 percent.

Stewart Mungo, President of the Columbia-based Mungo Homes describes it this way: “Family business owners and business owners in general spend all of their time trying to be the best they can be in running their business. However, when it comes time to thinking about succession, this is not what they are trained for. It is important that they plan ahead, and get the education and information they need in order to successfully transition their business.”

What steps can you take? First is to simply acknowledge that you need to start. Having a family meeting to declare this is a very good first step. Next, get some education. An easy way to do this is to subscribe to Family Business Magazine, a good resource on how to address issues facing family businesses. And it always features stories on real family businesses and their secrets to success. At the same time, there are plenty of family business books available as resources.

University-based family business programs can also be helpful; Kennesaw State and Wake Forest University being some of the more prominent regional ones. And Wofford College is hosting a family business seminar Aug. 22-23. For more information on the seminar, contact Rebecca Parker at ParkerRM@Wofford.edu.

Henry Hutcheson is the president of Family Business Carolina. Reach him at Henry@familybusinesscarolina.com.

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