Why most family business and wealth transition plans fail
By Emily Griffiths-Hamilton; Published in CPABC in Focus
Would it surprise you to learn that 70% of family business and wealth transition plans fail in each generation, despite the use of recommended legal, accounting, and financial planning structures?1 To be clear, “failure” in this case is defined as a family involuntarily losing control of their family business and/or wealth through factors such as inattention, mismanagement, bad investments, incompetence, foolish expenditures, and family feuding. Yikes!
To assess and understand this failure rate, Roy Williams and Vic Preisser of The Williams Group facilitated 3,250 interviews with family business owners at different points in their succession planning. They shared the results of these conversations in their 2003 book Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values.2 According to data drawn from these interviews, the four primary causes of failure are connected to the family itself. Here they are, in order of predominance:
A breakdown in communication and trust within the family: 60%
Strong effective communication and high levels of trust are essential to any high-functioning successful enterprise, and a family business is no different. One of the real legacies of a successful family business is a history of good decision-making. In a family enterprise, one of the first steps to take with regard to decision-making is understanding that there are three interdependent enterprise systems at work:
The family – responsible for articulating shared values and the development of a shared vision for the family’s human, intellectual, and financial assets;
Family business ownership – responsible for articulating shared values and the development of a shared vision and/or goals for the family business, in conjunction with the family’s shared values and vision. Family business ownership is also responsible for ensuring that family business management is effectively working to meet these objectives; and
Family business management – responsible for developing a strategic plan that shows how the family business ownership’s shared values, vision, and goals for the business will be achieved.
In the first generation of a family business, there is typically one leader who acts as the sole decision-maker in each of these three systems. By the second generation, however, there are often multiple decision-makers, and these individuals must work as a united team if the family’s tradition of good decision-making is to continue.
With each subsequent generation, the number of decision-makers may increase, making the need for unity all the more important.
Most families start to build unity by holding family meetings, sometimes with the assistance of an experienced family enterprise facilitator. These meetings can be an excellent forum in which family members can embark on shared learning about topics like effective communication and trust-building.
Unprepared heirs: 25%
Unlike the member(s) of the first generation of a family business, second- and later-generation family members typically do not “opt into” their roles; instead, ownership often arises as a result of legal and accounting structures implemented on the basis of professional advice. As a result, there is often a need to foster a culture of stewardship, responsibility, and commitment in the three aforementioned enterprise systems: the family, family business ownership, and family business management. Nurturing the upcoming generation of leaders and decision-makers will help families build organization, unity, and engagement in the first two systems. When it comes to family business management, however, leadership roles, like the CEO, can be, and often are, filled by non-family members in later generations.
Some family members worry that upcoming generations lack passion for the business. Passion is, without a doubt, a powerful element in the successful accomplishment of goals, but in a family enterprise, it doesn’t have to begin as passion for the family business. In working with family businesses, I’ve discovered that sometimes family members aren’t passionate about the business at the outset simply because they don’t know enough about their current and potential future relationship to the business and/or their roles and responsibilities.
However, successful family businesses often have family members who are so committed to the family—demonstrating passion for things like family harmony, family connectedness, and the family legacy—that their passion extends to securing the family business for future generations.
A lack of mission or vision: 12%
The importance of a shared mission or vision can’t be overstated in the context of a successful family business. A strong, compelling, shared vision will energize a unified, committed ownership base, and a successful family business can’t have too much harmony or commitment. I compare the work a family does here to a game of tug of war: If family members are aligned on the same side of the table, pulling in the same direction, they will win the game; if they start pulling in opposite directions, they will lose, with some or all ending up in the mud.
I’ve discovered that the question “What is our shared vision?” is a solid and typically non-contentious conversation starter for family meetings. To identify their shared values and vision, families should ask “What do we, as a family, stand for?” and “What do we want to achieve together?” These are good topics of discussion to practice communication skills and work on building family trust. Bear in mind, however, that you (or your client) are not likely to find conclusive answers to these questions at the first or second meeting. Before family members can determine what they want to achieve as a team, they may first need to understand the potential roles and opportunities available to them, and that may take several meetings.
Also, it’s important to remember that there are no wrong answers, especially at the start of the process. For communication to succeed, each family member needs to be supported and heard. If an idea doesn’t immediately resonate, it should not be shot down—it should go up on the board for discussion, with curiosity as the driver. This kind of non-judgmental discussion will help the family tremendously in later meetings, when they start to tackle substantive decision-making.
Failures of professionals: 3%
The good news is that traditional succession planning work is solid 97% of the time. The bad news is that succession plans still fail. So if it were possible, I would print the following in big neon letters: Although the commonly advised family business and wealth transition structures (usually designed to minimize or defer taxes and dictate the activities of upcoming generations) are not inherently flawed, they are not comprehensive enough to prevent failure.
Individuals involved in successful family businesses are aware of this and take proactive steps to strengthen family dynamics by:
Improving communication and building trust within the family;
Preparing upcoming generations for their future potential roles and responsibilities; and
Working to ensure that the family has a compelling shared vision.
Thankfully, many professionals are now better able to explain, address, and offer solutions for the qualitative issues that can be roadblocks in many family business succession and wealth transition plans. As a starting point, professionals can help by asking qualitative questions in addition to quantitative ones. Questions like “What keeps you awake at night?” typically elicit answers that have nothing to do with tax minimization or controlling structures.
Beating the odds
As a family increases in size, so too will the number of decision-makers at the table. Accordingly, family dynamics will have to be factored into the family business. The starting point should be a family meeting. I’ve found that holding family meetings is the most effective way to avert the primary causes of failure for family business transitions. By providing clarity and transparency about any decisions made, these meetings foster family unity and strengthen each member’s commitment to plans made in pursuit of long-term goals.
But what if your family (or your client’s family) isn’t great at communicating? It might be useful to hire a family enterprise advisor or other facilitator to help navigate meetings, especially in the early stages. With or without a facilitator, however, bringing family members together to create a shared vision will go a long way to keeping a family succession plan on track.
Emily Griffiths-Hamilton is a family enterprise advisor, conflict resolution coach, global speaker, and the author of two books on family wealth transition planning: Build Your Family Bank: A Winning Vision for Multigenerational Wealth (2014) and Your Business, Your Family, Their Future: How to Ensure Your Family Enterprise Thrives for Generations (2018).
Roy Williams and Vic Preisser, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, 2003, Robert Reed Publishers: Bandon.