Insights on Family Business Succession
Updated: May 17, 2020
According to Statistics Canada, family owned businesses account for somewhere around 60 percent of the country’s overall gross domestic product (GDP). Yet, as a general yardstick, approximately 70 percent of family businesses in North America either fail or are sold before being passed on to the second generation. Why? And is this an inevitable conclusion?
With Canadian family businesses accounting for roughly 60 percent of GDP while their U.S. counterparts generate about 50 percent of GDP, the high failure rate with regard to succession raises serious questions. This seemingly contradiction of “riches to rags” is even more pronounced when statistics indicate that less than 10 percent of family businesses are successfully passed on from the second generation to the third generation. Alarmingly, less than 3 percent of these enterprises survive succession to the fourth generation. The answer may lie in the fact that only about 20 percent of Canadian family businesses have a strong succession plan in place, observes the GoForth Institute, which provides educational courses to the family business community.
A notable point is that not all family businesses fall in the category of “small to medium-sized enterprises” (SMEs), which Stats Can distinguishes in its research reports. A generally unknown number of well-established family operated businesses exist which do not fall within the SME data – so the latter trend research is ineffective in tracking the success of these family enterprises. Highlighting the fact that family-owned is not necessarily “small”, the GoForth Institute observes that many of Canada’s well-known business are family owned, including Bombardier, McCain Foods Ltd. and Molson Coors.
So, how did these companies survive the ravages of time?
Speaking at a Family Enterprise Exchange Business Forum event, Arthur Salzer, Chief Executive Officer of Canada’s Northland Wealth Management, an independent Canadian family office, explains that the biggest hurdles facing family businesses when it comes to succession is lack of advanced planning and a breakdown of communication within the family. “It’s more than just managing wealth [inherent in the family business], but managing your family,” he adds.
The cornerstone of successful succession of the family business comes down to planning, observes Arthur Salzer. “When you plan, you become pro-active and not reactive.” The basic groundwork of such planning involves establishing a “family constitution” consisting of a series of documents dealing with a number of broad-range impacts on the family business, such as entry and exit strategies applying to family members.
In a similar vein, first-generation founders should be transparent with their family with regard to estate planning and trusts. Adding on to what Salzer says, Paul Mascard, President of Northland Wealth Management, explains that without clear guidelines, family members often think that the accumulated wealth inherent within the family business will simply be passed onto them regardless of their interest in the business.
Establishing “fire drills” in terms of “what ifs” is another critical component in ensuring the future success of the family business. This essentially is an outline of potential events that could negatively impact the business and the family’s wealth – the objective being to put into place appropriate risk management responses, he notes.
Overall, Salzer believes that establishing open communication and interaction within the family is paramount. “A family should plan and play together to communicate its culture within, thus becoming a social compact,” he adds.
A report published in the Harvard Business Review (HBR) titled “Avoid the Traps that can Destroy Family Businesses” suggests that the stereotype view that over 60% of family businesses will fail when it comes to succession planning is simply not true. Yes, coping with changing outside factors, such as technology, globalization and changing consumer behaviour, can negatively impact a family business. Such factors, however, apply to all businesses and those that adapt regardless of whether they are family-owned or not is irrelevant, the report observes.
The report highlights three key “traps” that undermine the ongoing success of family businesses. “The high failure rates of family businesses may seem unavoidable. They’re not. In our work advising these types of companies, we see them repeatedly caught in the same traps. Recognizing and learning to avoid these traps can boost the odds of long-term survival,” the report notes.
The HBR report underscores three main “traps” to avoid:
– “There’s always a place for you here” – Some founders of family businesses make their offspring obligated to join the company, which can backfire by creating a crop of managers who aren’t interested in being there. Ideally, it’s healthy to expose family members at an early age to the business so that they can make informed decisions to whether to pursue a career there.
– “The business can’t grow fast enough to support everyone” – Families often grow quicker than the growth of the family businesses. To avoid this trap, the business founder should ensure that only committed and qualified relatives are allowed into the company. Another solution is to plan a development strategy enabling the business to grow and create responsibilities for additional family employees.
– “Family members remain in silos according to bloodline” – One of the most striking things we’ve noticed about family businesses is the tendency of fathers, sons and daughters to specialise in the same aspects of the business, whether it’s finance, operations or marketing. By staying in “specialised silos”, the next generation of managers fail to achieve cross-functional expertise needed for executive leadership.