YOU MAY THINK THAT THE COMPANY YOU CREATED WILL LAST FOREVER, ESPECIALLY IF IT’S A FAMILY BUSINESS WITH SIBLINGS OR CHILDREN INVOLVED IN ITS OPERATION. BUT STATISTICS SAY OTHERWISE.

According to the Family Business Institute, less than one-third of family businesses survive into the second generation, 12 percent into the third generation, and just 3 percent into the fourth generation or beyond.

WHY SUCH OVERWHELMING ODDS?

Common pitfalls that contribute to those numbers include:

• No real business succession plan: The unexpected exit of the owner due to death or illness contributes to this cause, leaving a company searching for a way to survive, when even a modicum of a succession plan would have helped. Too often family members are assumed to know how to proceed. Yet the leadership vacuum created by a lack of succession planning is quickly filled with confusion and frustration.
• Lack of professional management and leadership structure: A powerful owner can drive even a large organization for years. Competent fellow executives may fill necessary roles (finance, human resources, engineering), but also understand that they take back seats to the boss. In the sudden absence of The Boss, the company can crumble,. All members of the C-suit must have ongoing roles in decisions that impact the future of the company.
• Lack of outside advisors/advisory board: Your business is successful, so you and/or your leadership team don’t require outside assistance, right? Wrong. Advisors and/or a board are critical allies guiding a company, questioning the owner’s decisions and helping him to make course corrections.
• Unreasonable expectations: This pitfall comes in two flavors—an owner having an inflated view of the value of his business, leading to reluctance to sell; or an owner who expects family members to take over, even when kin have no attachment to the company.

HOW DO YOU INCREASE THE ODDS OF SURVIVAL?

Three strategies:

• Well-crafted succession plan: Succession planning requires a plan. Make sure it defines the prospective time of transition, objectives of the exit, and key players and activities (e.g., an exit involving an M&A would include a time for a business valuation, finding potential buyers, etc.).
• Engaged and supportive leadership and stakeholders: Regularly track the traits and roles necessary for the CEO and other executives to move the company toward the next generation (e.g., strategist, face of the company, industry liaison, motivator). Then identify possible successors if one or more of these leaders move on. It’s not uncommon to find a role that can’t be filled internally (especially that of the CEO/owners) which then informs the company’s talent management efforts.
• External, professional guidance: Successful business leaders are adept at envisioning new markets and/or products, engaging customers, guiding operations, motivating and managing a workforce, etc. But few executives have managed their own successions. You need the same level of experience and expertise you have in managing your company to deal with the unique aspects of succession (e.g., estate planning, tax liabilities, transfer contracts). Go get it.
• Commit to the plan: You made a succession plan, now keep it. Or, better yet, you made the plan long before you intend to leave the company, so review it annually with all necessary parties (advisors, board leadership team, family members, etc.) and make adjustments as required.

At HBE, our team has extensive experience in providing succession planning services to meet the unique needs of our clients across various industries. For more information, please contact our office at 402.423.4343.

This article originally appeared in BDO USA, LLP’s “Manufacturing Output” newsletter (Fall 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com