Family businesses in developed countries such as the U.S account for the 50% of the gross domestic product from small business to large corporations. However in the fortunes 500 companies list family businesses account for the 35% which shows that big family corporations rule the world. These family businesses are powerful and at the same time very complex that create both of them advantages and opportunities as well as challenges. The most important challenge is to effectively align the business system with the family system which it cannot come naturally. In the one hand we have the family which is driven by emotions and on the other hand the business that is driven by economics. The interaction of family cohesion and business achievement often creates outstanding business performance but at a cost. If there is lack of coordination, good things that benefit the business can damage the family and when there are family conflicts can damage the business.
The crossroad between ownership, management and family found in family business creates challenges for succession. During succession trust and harmony in the family can complicate the transition process and cause conflicts. Elements affecting family business succession can be the influence of the board of directors and other experience with succession that can be considered as business factors.
Family businesses have four general strategies: invest, hold, harvest or sell. These strategies reflect the owners investment commitment based on the business’ strategic prospective for value creation. Family businesses need to develop family and business plans because of five important issues that arise from the conflict between the family expectations and the business demands. These issues appear to be in most of the family firms not caused by conflicted relationships among members but driven by life cycle and life events, family values and experiences and real differences between family goals that are emotional and business goals. In order to have the control of these issues, cautious planning and decision making must be considered, in order to ensure family harmonization and business performance. Also to secure effective communication between these family and business goals, conflicting demands must be addressed from both aspects.
The five structural issues are:
- Control: How are decisions made?
- Capital: How are financial resources allocated?
- Careers: How does the family create career and leadership roles?
- Connection: How do we keep family relationships strong?
- Culture: What values drive our planning, decision-making and behavior?
Looking to the above issues closely we can understand how family expectation and business goal often don’t match and result in to conflict. Preparing the next generation careers is often a source of stress and misunderstanding. All businesses need capable and well trained executives to manage the firm. However most of the parents see their children as the most suitable and entitled to the family business than anyone else but is not always like that. Usually there are children that are entitled to run the business but they lack of expertise and attitude, these cannot be entitled of the business because they will drive the business downward. When a family member expects to run the business like its parents, his or her dream collapse because the family haven’t planned succession properly or there is a lack of fairness in recruitment method. These scenarios may cause conflicts among family members relationship within the company and losses for the business. So, in that case family and business planning must be completed and linked with each other in order for the family members to be informed and focused about the business requirement, where family is treated fairly and the business has capable employees.
A good start for the family is to identify its values and its future vision. Its values can be filled in the vision statement of the company that will inspire and determine what the actual business and its strategy will become. However if the family’s vision is to remain a small family business that competes in the local market, then family employment is feasible. The criteria of selecting family members will be devotion and interest only, which in case of staying within the family business, then the management positions for family members are certainly possible.
On the other hand if the vision of the family is to grow the business and dominate the market or industry, the family will think of its business requirements and consider a professional management that includes skills of being able to identify strategies that suits the family business needs to dominate the market or industry. Hence, the family business will require key management people with elevated skills that could come from the family or not. In conclusion, families that identify their values helps them to agree on their vision statement that drives planning for align family and business activities that will ensure in the family and business performance.
Leaders of family businesses who usually are the primary owners can exercise great control over the process of succession. According to much of the research on this subject has focused on their unwillingness to cede control, which according to relevant theories is an example of people who lose leadership and suffer from a psychological loss from retirement due to their role as leaders that offered them respect and admiration which they may not discover it somewhere else. Another challenge may be consider the emotional burden of the leader of choosing a successor from among his children, which can delay the succession process. Additionally they rely on income from the business to fund retirement and they may not forward with succession if they believe the business cannot function without them.
Referring to the successor’s experience of succession, its interests and abilities have an impact on succession outcomes. In most organizations they gain control through demonstrating their previous experience and competence but in family business it is unclear if this process works in the same way. Relevant family business research finds that the way the heir experiences the succession process can add to his or her fulfillment with work as well as to be prepared to take over.
Determining the Current Owners Needs and Objectives
The base of family business succession plan is to determine “what”, “when” and “how” the owner’s goals and objectives. It is important to know about the goal and objective of family business because this is necessary to decide about financial planning, retirement planning, business planning, business succession planning, tax planning and strategy of company.
The goal and objective can help the owner’s advisers to establish a good outline for succession planning. This information can give guideline to balance between family situation and business situations. Also difference between current situation and their goal and objective situation can show strengths, weakness and reality of the family business situation. Therefore, achievement of good plan needs many parameters that it is including family values and business values. Family values present their situation in the business, the owner’s family dynamics, restrictions of the business and the family currently. Business values can present company’s cash flow, competition level, reputation and their role in current market.
In a nutshell, this part involves determining and considerate the business owner’s goal and objectives that present situation and the limitations, observing the reality of the situation and making realistic recommendations that achievable by the owner and his business and family.
A family businesses succession plan needs to involve the financial needs of the owner and his or her spouse. In reality most of the family business owners are depending on the business to provide for their retirement because they can have less cash in hand and more cash on paper which means that most of their money is invest into their business. Family business owners having in mind that one day their money from pension will be spend after they retire and do things that they have not done before where for many years they made sacrifices to run their business. Also whatever they have not done all these years even for the rest of the years they have left they want to spend their time with their family and get involved in community and not profit activities. However is it possible for the business to support their owner and his or her spouse after succession? And is it possible for the family business to support the new owners “children”.
In addition the owners goals and financial needs need to be synchronized in order to be brought into harmony because most of the times the owner evaluates its company much more that it actually. A true business valuation will convince the owner about the correct value of the business in order to be cautious to make correct decision that concerns his or hers personal goals and financial needs, particularly for retirement.
Why Succession Planning in Family Business is Important?
The succession to family firms is a key moment in the life of any family firm. In the U.S. only the 30% of family firms will survive in the second generation and 10% to the third generation. In general the 50% of world’s economy is made up of family businesses and only 10% will survive to the third generation, these shows that the world economy depends wholly in the long term sustainability of the family entity. In order for a family business to survive it must be succeeded each and every generation must be succeeded by the next which is the most crucial family business
No one can plan for the worst case scenario because even you can predict your financial status for the future and make a breakeven analysis there is no way to predict the unpredictable. The unpredictable can be natural disaster, national economy collapse, CEO illness or retirement which is a good reason for having a succession plan prior. Contingency planning can anticipate the worst case scenario that will help the company to stay afloat.
Succession planning together with current evolved practices over the year have grown and changed. Succession planning is not only a plan for leadership change is something more, it helps to establish a strong leadership that will ensure the survival of the business from competition in the marketplace and stress the executives the importance of reviewing and examining the mission and objectives of the company.
Also having a well prepared succession plan for a family business it gives the opportunity for the rest of family members to have a voice and express their needs and concerns. It will make them more responsible and care more about the organization which will enhance a successful succession planning. It will increase the team spirit and will avoid the temptation to solely carry the entire weight of creating and sustaining a plan.
Income and expenses are sustained when a succession plan is in place, because it can provide answers as to the future income the company will need and what expenses will occur once the founder steps back from the main leadership role. Having a good succession planning gives to someone a helicopter view on how to examine his or hers employees and not mistakenly focus solely on replacing high level executives. Neglecting to add all the employees from all layers of management and their subordinates, not just the high executives to succession planning can cause a series of consequences into the future.
Moreover succession planning increases better relationships between departments by developing better communication between them and resulting into a more cooperative environment of synergy which develops a culture of strength and team spirit. Succession planning activities must be linked with human resource practices because after all Human Resource is about people and people are the most valuable asset of every company. Including HR in succession planning can reveal important processes such as employee evaluation processes that help to decide whether to fill vacancies with internal candidates from the company.
Succession planning keeps emotions always high because change is major component of succession plan. Change can be a source of stress in case of people where the jobs at risk. On the other hand it can be an exciting process because it plans for the future and can inspire employees to get involved and loyal to the company.