According to the European Commission family businesses make up more than 60% of all companies in Europe.
Common European definition of a family business:
- The majority of decision-making rights are in the possession of the natural person(s) who established the firm, or in the possession of the natural person(s) who has/have acquired the share capital of the firm, or in the possession of their spouses, parents, child, or children’s direct heirs.
- The majority of decision-making rights are indirect or direct.
- At least one representative of the family or kin is formally involved in the governance of the firm.
- Listed companies meet the definition of family enterprise if the person who established or acquired the firm (share capital) or their families or descendants possess 25 per cent of the decision-making rights mandated by their share capital.
Yet few have adequate succession plans in place, whilst only around 12% survive beyond the third generation.
Though businesses can fail for various reasons, such as due to inadequate financial planning and management or as a result of adverse financial conditions, the majority of family business failures are the result of either the sudden death of the founder or during the generational transition phase when businesses are more likely to be vulnerable to external market forces and shocks. Therefore succession planning is key to a firm’s long term survival of family businesses. However though critical and important, such a process could prove to be difficult and present a number of barriers and challenges. Barriers include issues such as the founder’s resistance to planning for such an eventuality due to fear of losing control of the business after so many years, or due to the acceptance of the status quo, as a way to eliminate conflict between possible successors. Planning however difficult is key to the long term prospects of any business.
The Ladder Consultancy recommends that a succession plan should be carried out in conjunction with a business plan in order to ensure that succession and transition strategies are aligned with business strategy. This ensures that any decisions taken are informed by the needs of the business, thus reducing the risk of business failure once the hand over to the next generation takes place. This however does not mean that a succession plan should put aside the needs of those affected by the choices made hence the family. Therefore as much as possible a balance or compromise should be found. This balance can be achieved through the fostering of a shared vision combining the different elements present within the family business structure. Moreover, a holistic approach should seek to identify the strengths and weaknesses of each potential successor and address any misunderstandings which could lead to conflicts between family members, a situation that ultimately could undermine the business, which the founder has built with so many sacrifices over the years.
Succession planning should start as early as possible; in order to ensure that there is enough time for the potential successor from a young age to build up the necessary skills over the longer term . This should also allow the founder to tackle any possible conflicts which might arise in cases when there is more than one possible heir. Communication will play an important role in this process, both to ensure that everyone is informed about his/her role and also as a way of building trust through openness and a shared long term vision. This will also ensure that succession takes place in a gradual manner, rather than in a disorganised, sudden manner, hence giving the time needed for all those involved to absorb the change taking place and for the successor to build up the level of trust and credibility needed to lead the organisation.
Finally, whilst on paper succession planning is an important factor in ensuring future business success, contingency planning should also be considered, such as the possibility of choosing an outside successor or an exit strategy that would mean selling off the business.
Through the Family Business Act, family businesses are able to access different financial incentives, assisting family business owners to better plan and successfully transfer their business to the next generation.