Role of Family Firms

In order to realize the importance of succession planning for a family firm, one must first comprehend the mammoth role that these firms play in not just the global market but also in our own communities.

Looking at the big picture: In a study by Ballini (2020), an estimated 2/3 of global businesses are reported to be family-owned, while also representing 70% for the annual global GDP. In the United States, family businesses account for more than half of the nation’s GDP, more than 60% of employment, and nearly 80% of new job creation.

Here in Iowa, we know that the family business is central to our communities. The state alone has roughly 88,000 farms, employing 129,000 Iowans. Of these farms, more than 97% are family-owned (Iowa Corn Growers Association, 2017). Family firms have continuously impacted the lives of people in local communities throughout the United States and across the globe via the provision of jobs, creation of income, and the generation of wealth.

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The Critical Issue and Why it’s so Important

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While the profound impact that family businesses have on the economy and communities goes without question, one of the key areas for securing a firm’s future is lacking. That essential element is the succession plan. Within the upcoming seven to ten years, an estimated $10 trillion worth of family companies will hope to pass on leadership to a new generation.

Although these family-owned firms have immense potential to shape the market, they must handle the essential tasks that will get them to the next generation. Research shows that many family businesses do not have a plan nor process for succession. This is telling, as a 2020 article by Umans, et al. found that only 1/3 of family businesses worldwide are able to successfully transition into the next generation. Even more daunting is the 12% chance of making it to a third generation, followed by the 3% of reaching a fourth.

How does Succession Planning Differ for Family Businesses?

Whilst there are many similarities in the succession planning of family firms and non-family firms, understanding the key differences can be critical for the longevity of the firm. Outlined below are some of the unique challenges that family businesses face, as well as best practices that they can utilize to better prepare for the future.

Challenges to Succession Planning

One of the central and innate challenges to succession planning in general is the unique circumstances of each firm. This is only magnified for the family firm, as they are dealing with both distinct business and family circumstances.

1. Emotional ties

One may ask, “why are founders sometimes reluctant to plan for succession…and what are some of the consequences?” Although this reluctance can stem from lack of foresight, it can also be a sign of the leadership’s strong emotional tie to the firm.  This sense of attachment or perhaps fear of retirement can sometimes become unhealthy and negatively impact stakeholders’ ability to work with the family firm. It can be a hard challenge for leaders to think about what and who comes after them, but nonetheless, by planning for succession, they will be doing an invaluable service to both the current and future state of the firm.

2. Lack of preparation

A key issues that many businesses experience is failure to establish a succession plan in the early stages of the business. Prompt planning is critical, as it allows owners to have a system for effectively preparing the next generation of leadership, while also providing a framework to use in case there is a lack of interested or qualified successors. While a succession plan process can evolve over multiple generations, having a framework established early on helps future owners. This framework is beneficial as family members may have varying views on goals, direction, and potential successors.

3. Disparate family goals

Family businesses face additional challenges due to the possible lack of separation between work and home life. Discrepancies in firm goals often arise in an organization and this is no different for the family firm. When it becomes time to appoint a successor, inconsistencies in the desired vision for the company can cause turmoil amongst family members. This can further be magnified by personal and intergenerational differences as well. Furthermore, desired successors within the family may choose to pursue a career outside of the organization, leaving the firm scrambling for their next leader.

Best Practices

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There are several key steps for a firm to follow that are conducive to the development of a robust succession plan, as mentioned in Eyes on the Horizon: Developing a Succession Plan. While there is a degree of interconnection between the family succession plan and the general succession plan, there are also imperative differences at various levels. We suggest employing the following practices to help family firms gain the upper hand in the fight against the formidable opponent that is succession crisis.

1.        Establish family governance systems

Family governance can come in both formal and informal channels. A formal system can come in the form of a pact, charter, or even code of conduct in which the family holds itself. This can be reached through internal meetings or discovery interviews. By establishing a formal network that encompasses both the family and business structure, the firm should be able to determine what is important for them going forward. This vision will help to set the business up for success in the future and bring forth greater alignment.

Equally important to the family business are the informal systems of governance. Some examples of said informal processes include the use of informal and more open family meetings, as well as the creation of informal norms. Informal norms are unique to the specific firm, but often include family values, the firm’s original vision, internal storytelling about the firm, and the ways in which the family culture is shaped.

2.        Focus on your alignment

Alignment is key for all firms, as it allows internal members to be on the same page, helping to ensure a smooth transition. Internal alignment can be built through the aforementioned informal and formal practices. These include having coordinated beliefs on questions about the company’s mission, values, vision, and direction. Alignment is essential for the family firm, as they often will be with dealing other external stakeholders who they must also align with.  Through alignment, the firm can come to joint agreement on areas of importance that they can then deliver to key stakeholders, such as a Board of Directors. Not only will this allow for a higher level of transparency, but it will also create mutual trust both within the family and with key external parties.

3.        Develop a sustainable succession system

While many firms fail to create a succession plan in general, many also neglect to make their succession plan sustainable. Rather than highlighting a rough roadmap that merely gets you through the current succession process, focus on cultivating a long-term system that gets to the root of firm continuity. This can be done first and foremost through planning early. Utilize information from formal and informal governance practices, such as discovery interviews to establish central elements for your system. This also allows for early alignment of core values, which should be guarded and passed on within the firm.

4. Utilize external stakeholders

The inclusion of key non-family stakeholders, such as trusted advisor and a Board of Directors in the succession plan creation is an area with thoroughly researched backing.

Salvato & Corbetta, as well as Lane, et al. found that “trusted advisors can improve the efficacy of the succession process by mentoring both incumbents and successors, providing new insights on the succession, or acting as agents to bring different opinions together and achieve compromise solutions” (as cited in Michel and Kammerlander, 2015).

When properly used, reliable external sources can bring forth a host of benefits, such as gaining quality input that can lead to a more efficient process. Furthermore, a trusted advisor or Board of Directors can serve an intermediary for the family firm, helping to mitigate divergent visions and firm misalignment.

Conclusion

Succession planning is a critical piece of business operations, especially for family-owned businesses. Due to the profound role that family firms play in both global and local economies; thorough succession planning is of the utmost importance. An effective succession system acknowledges the inherent challenges of planning for the future, while still utilizing both formal and informal practices. By building up a strong internal family culture and making the most of trusted external parties, family businesses will be empowered to tackle not just the succession decisions of today, but also those of the future.

Learn how we can help your succession planning here.

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References

America's Economic Engine. Conway Center for Family Business. (2020, December 11).

https://www.familybusinesscenter.com/resources/family-business-facts/.

Ballini, B. (2020, February 21). 2019 pan-european RRA study on FAMILY-OWNED

Business: Thought leadership. 2019 Pan-European RRA Study on Family-Owned Business. https://www.russellreynolds.com/insights/thought-leadership/2019-pan-european-rra-study-on-family-owned-business.

Harvard Business School. (2001, November 12). The Three Components of Family

Governance. HBS Working Knowledge. https://hbswk.hbs.edu/item/the-three-components-of-family-governance

Harvard Business School. (2001, November 12). The Three Components of Family Governance. HBS Working Knowledge. https://hbswk.hbs.edu/item/the-three-components-of-family-governance.

Iowa Corn Growers Association. (2017, March 9). No, really, iowa's farms are almost entirely family owned. No, Really, Iowa’s Farms are Almost Entirely Family Owned. https://www.iowacorn.org/about/news/no-really-iowas-farms-are-almost-entirely-family-owned/.

Michel, Alexandra, & Kammerlander, Nadine. (2015). Trusted advisors in a family business's succession-planning process—An agency perspective. Journal of Family Business Strategy, 6(1), 45-57.

Umans, Ine, Lybaert, Nadine, Steijvers, Tensie, & Voordeckers, Wim. (2020). Succession planning in family firms: Family governance practices, board of directors, and emotions. Small Business Economics, 54(1), 189-207.

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