The issue of succession planning is a perennial pain point for businesses—and even more of one for the large contingent of experts who persistently try to impress its crucial importance on business leaders. Despite the experts’ urging, most CEOs and business owners leave the issue of transferring ownership and control on the back burner, at best throwing together a “hit by a bus” contingency plan for succession and considering the task done. Only 54% of publicly listed companies are actively developing successors for their top C-suite executives, and 40% say they don’t have a single viable successor should their CEO unexpectedly exit.

Meanwhile, family-owned businesses, which create half of Canada’s private-sector GDP and generate 7 million jobs, are doing an even poorer job: as of 2020, even within the pandemic, only 30% had a formalized succession plan—and that represents a doubling from the remarkably low figure of only 15% in 2018.

For public companies, the most visible cost of this attitude comes in dollars: it is estimated that large companies that undergo unplanned or forced turnovers would have made $112 billion more in the year before and the year after the succession if the process had been planned.

For family businesses, the cost of poor succession planning is often even higher: the survival of the business itself. The reason is that succession lies at the heart of what a family business is. While many definitions of the term “family business” exist,[1] nearly every one of them centres on the inter-generational, intra-family transfer of power. Family-business guru John L. Ward’s widely accepted definition is that a family business “is one that will be passed on for the family’s next generation to manage and control.”[2] The professional-services firm KPMG lists among its criteria not only that “the family maintains control through a family member in a senior leadership position,” but that there exists “a clear intent to pass this ownership / control to the next generation.” [3]

The idea that succession is at the core of what it means to be a family business is borne out by the intentions and practices of business owners themselves. For instance, in 2019, 62% of family-business leaders responding to a major global survey said they intended to pass the business to the next generation [4]. In 2021, spurred by the global COVID-19 pandemic, the number of leaders who named keeping the business in the family as a top priority had risen to 65%, from 61% two years earlier.

It is perhaps the fact that succession is synonymous with survival that has led family-business experts and researchers to link low rates of succession planning with the much-cited statistics of family business failure:

  • Seventy percent of family businesses last only one generation,with 30% making it through the second generation and 12% through the third. Only 3% of family businesses survive to the fourth generation and beyond.[5]
  • The “three-generation” rule of a business family going “from shirtsleeves to shirtsleeves” in three generations remains a significant reality. Beyond the business-survival statistics, figures show that 42% of businesses run by the first generation show double-digit growth, while that figure drops to 32% for businesses run by the second generation and only 27% for those run by the third generation. [6]

Granted, it may be unfair to lay all of these grim statistics at the feet of poor succession planning. There are many other factors in business failure, from changing markets and dominant competitors to digital disruption and global pandemics. Still, even if an effective transfer of ownership and control to other family members is not the sole element in keeping a family business alive, it is a necessary one. The authors of the 2016 PwC Family Business Survey call transfer of power to the next generation “the fault-line in this business model”; noting that the figures on succession planning have hardly budged over the years, they express skepticism about family-business leaders’ ability to fulfill their ambitious plans for growth, saying, “There’s no point in having detailed plans for business continuity if the single most significant risk to this is not addressed.”[7]

The disconnect between most family-business owners’ stated desire for legacy and long-term success and their reluctance to carry out this non-optional step in achieving those things has led frustrated experts to look for the source of succession planning’s credibility gap. Many have come to believe that the root causes lie in psychological factors, rather than the realm of business governance. These factors include the mentality of the owner/CEO, difficult family dynamics, sibling conflict, poor communication, lack of trust, and psychological unpreparedness on the part of potential successors.

With the cause of the problem identified, a two-pronged solution is now generally recommended. The first prong is to help business-owning families address and manage the psychological factors that are leading them to resist future-planning tasks.  This means encouraging business leaders to employ family-business therapists, family-dynamics counsellors, and other types of psychologists. Though a psychological approach has often been a hard sell within a culture that puts a premium on the business side of things, the idea of putting resources into these elements has become increasingly accepted.

The second prong is to mitigate the influence of psychological factors by bringing in third parties such as independent board members and future-planning experts to keep succession planning firmly on the business agenda. This “professionalizing” of family governance maximizes the “business” element of the family-business process and minimizes the ‘family” aspects that are creating problems.  As the 2021 PwC Family Business Report notes, “A professional approach strips emotion and personal bias, common stumbling blocks for families, out of decisions.”[8]

The goal here is both to bring a set of balancing perspectives into the process and, in a manner of speaking, to get the family out of its own way. Family-business owners, and other family members as well, usually have exceptional traits and talents that have allowed the business to thrive. When the prospect of transferring power is moved out of the realm of personal emotion and into the executive realm, those talents can be brought to bear, and a strong succession plan can be viewed as another significant step in creating a business and legacy that lasts.

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[1] Understanding the Family Business Keanon Alderson https://www.researchgate.net/publication/334680863_Understanding_the_Family_Business_Exploring_the_Differences_Between
_Family_and_Nonfamily_Businesses_Second_Edition_Entrepreneurship_and_Small_Business_Management_Collection
[2] 1987 p. 252
[3] KPMG 2019 Global FB Survey https://thestepproject.org/wp-content/uploads/2020/09/STEP2019GlobalFamBizSurvey-Report1.pdf
[4] https://www.financialexecutives.org/FEI-Daily/February-2019/Succession-Planning-Key-Considerations-Between-F.aspx
[5] Boston Globe Sponsored. More Than 8 out of 10 Family Businesses Have No Succession Plans. http://sponsored.bostonglobe.com/rocklandtrust/more-than-8-out-of-10-family-businesses-have-no-succession-plans/
[6] PwC 2018 Global Family Business Survey https://www.pwc.com/gx/en/family-business-services/assets/pwc-global-family-business-survey-2018.pdf
[7] https://www.pwc.com/gx/en/family-business-services/global-family-business-survey-2016/pwc-global-family-business-survey-2016-the-missing-middle.pdf
[8] PwC Family Business Report 2021. https://www.pwc.com/gx/en/family-business-services/family-business-survey-2021/pwc-family-business-survey-2021.pdf