Succession Planning for Family Owned Businesses
Family Owned Businesses (FOBs) play a crucial role in the global economy. They are the backbone of any country’s economy and are the major force behind economic progress, growth and job creation. For instance, in the United States, FOBs account for 64% of the Gross Domestic Product (GDP) and generate 62% of the country’s employment, whereas in Saudi Arabia, FOBs account for approximately 27% ($216 bn) of the total GDP (2018:$786 bn) and employs around 52% of total workforce in the country.
The founders of business spend their lives and put in all their time and efforts for establishing their business, yet, they give little or no thought regarding the most important element that would prove to be the stepping stone towards the long-term success of their business; Succession Planning.
We plan to publish a series of articles where we aim to discuss the significance of governance for FOBs. This is our first article from that series and here we have discussed the succession planning for FOBs in general as well as the importance that this challenging business decision holds.
Succession planning in the domain of the FOBs is defined as the process, which enables the founder of the company to transition the ownership and management of their business to their next generation.
Challenging Business Decision
For most founders, succession planning is one of the most challenging business decisions they take in their lifetime. During their days in business, they give little or no importance to the fact that in case of their retirement or death, how would their next generation take over the business.
Importance of Succession Planning for Family Owned Businesses
Having a formally documented succession plan in place enables the founders to smoothly transition the ownership and management of the FOBs to the next generations.
A number of studies have been carried out throughout the world that suggests that the FOBs having a formally documented and communicated succession plan really aced in the successful transition of their business to the next generations in contrast with those that do not have a formally documented and communicated succession plan. Yet many FOBs do not bother to give it a thought.
Identify the best talent
Succession planning is a continuous process that involves the handing over of ownership and management to the best talent among the family. However, this requires the identification of the best talent and to identify such talent or individuals, efforts need to be made to pinpoint the talent who have the leadership and entrepreneurial skills as well as are passionate to carry forward the vision of the family business. Once the talent is identified, they should be educated and trained with hands-on experience to prepare them for their future role in the family business through their professional and personal development.
Succession planning is not only important for the smooth transition of the family business to the next generation; it also supports the continuation of the family business, generation after generation. While its importance is clear, however, still many family businesses fail to formally take up this task and considers it a burden and a waste of time.
Many studies suggest that family businesses fail to reach the next generations and failure to plan the succession might be reflected as a reason for that. According to a survey conducted by Price Water house and Coopers (PwC) in 2019, 69% of family businesses in the Middle East (and 85% globally) have no formal succession plan in place.
In this regard, therefore, it can be considered that failure to plan the succession of the family business to the next generations might eventually lead to planning for a failure of the family business.
To Avoid Conflicts between Family Members
Family members in a family managed business may get into conflicts when there comes a time to transfer ownership and management of the business. At such point, unqualified family members may try to play their cards to get to some senior management positions for which they do not have any requisite knowledge and experience and someone else from the family is more suitable and deserving of such senior positions. If this sort of conflict occurs and continues for long, this may create some serious problems for the continuation of the family business. Having a formally documented and communicated succession plan may save the family members from getting into such conflicts that may severely damage the family business and family relationships.