Leading in Change

Why do so many family businesses fail in finding a suitable successor?

Mars 29, 2019
By Daniel Müller

It is not easy to successfully found and lead a company. In addition, it is not an easy task to pass on a company to the next generation. The vast majority of today’s companies are a family business. Many of these businesses, in most cases small- and medium sized, disappear over time. Only a few of them make it until the third generation or even longer. 

In this blog post, I will walk you through the economic relevance of family businesses and the impact of failed Succession Planning. This leads me to the question: Why do so many family businesses fail in finding a suitable successor?

A very high percentage of businesses in western economies are family businesses. Most of them employ a few dozen employees. In Switzerland for example, only 1% of all businesses employ more than 250 people. Especially in rural and economically underdeveloped areas, these family businesses are the backbone of the local economy.

The legacy of the baby boomer generation

Due to the political and historical situation in most European countries, many of today's company owners were born in the so-called baby boomer decades of 1950s and 1960s. Nowadays they are, or soon will be, in the retirement age. Based on this fact, the western world will have a huge demand for successors of family businesses within the next years. As the job of a company owner has become more demanding and challenging in today's world full of uncertainty and complexity, fewer people want to become an entrepreneur and company owner.

Thinking of the time a company owner comes to the end of his working life, there are several different options to organise the era after the current owner:

  • One option would be to shut down the business completely. If we think of all the energy and lifetime investments over all these years, this option is -from an emotional point of view- the most unattractive for the owner to think of
  • If it came to continuation of the business, there are no options. Either Succession Planning is done within the family or the successor could be a family-external person
  • Another option would be to sell the company within a Mergers- and Acquisition Process

Based on my personal experience, the option of family-internal Succession Planning is the most desired way to continue. I believe the reason for that lies in the fact that Succession Planning as such is a much more emotional process than most people consider it to be. However, this depends heavily on the personality, the mind-set and the professional attitude of the owner, who is about to hand over his lifetime project.

In a previous piece, I discuss the key success factors for a successful handover to the next generation and the key steps in that process: Read it here.

The unacceptable truth

As I meet company owners on a regular basis in my role as Partner at Mercuri Urval, I often hear the following when it comes to not addressing Succession Planning:

  • "I have a plan in my mind, but it's just not written down on paper yet" 
  • "I'm not planning on retiring"
  • "I just haven't thought about it"

Taking into account the economic relevance and size of many family businesses, none of these answers is acceptable. It is not acceptable for the employees, nor for society from an economic perspective. Moreover, the answers are also not acceptable for the families behind the owner, who deserve to have a plan, how to protect their wealth, which accumulated over decades and sometimes even over generations. Finally yet importantly, it would be advisable for the company owner to have a plan, how to protect his/her lifework.

So, why do so many companies fail?

Succession Planning is highly underestimated and unperceived by society. It is a "hot" but not openly discussed topic in western economies. The process of Succession Planning is very emotional for all involved parties, especially within a family. Therefore, in most cases it is put on the shelf. I would even claim that Succession Planning is the most important task of a company owner.

One of the main reasons why family business do not move from one generation to the next is due to a lack of preparation, and not that they do not want to. . Therefore, preparing and starting early is the absolute key. As family business are very long-term oriented and planning in generations, the Succession Planning process is also an issue that has to be organised in a long-term perspective.


 

Do you want to discuss the topic further? Please reach out to Daniel Müller, Partner & Director at Mercuri Urval´s office in Zürich.