Prevent Family War by Succession-Planning
THE GLOBE AND MAIL – REPORT ON BUSINESS – Monday, April 29, 1991 – B6
In recent years, the squabbling Ballard, Bilks and Steinberg families shocked many business people with their public bun fights and corporate shakeups.
Such wars of succession are common in family owned businesses – large and small alike.
"The kids are left to fight it out after the owner dies," says Aron Pervin, head of Pervin & Co., a Toronto-based consulting firm that specializes in family businesses. "Horrible disputes break out, and once-loving families are split apart."
Partly because of that, only 30 per cent of family owned firms are passed on to the children, says Mr. Pervin, and a mere 13 per cent make it to the third generation.
Few of Canada's family owned businesses bother to create formal succession plans. Left without clear directions from their founders, many are racked by chaotic scrambles for control.
When so much bad blood appears, family members often decide they can't work with each other and liquidate the company.
It's a pity, because many of Canada's 600,000 family businesses offer substantial earnings and satisfying jobs to talented spouses, sons and daughters. It's also a shame to see the quick destruction of a company that took a lifetime to build.
But a number of factors prevent company founders from planning for the future. First and foremost, most entrepreneurs won't confront their own mortality. They figure that succession plans are unnecessary, since they plan to stay around for a long time.
Many entrepreneurs refuse to even think about the day they will lose control of their personal fiefdoms – which give them money, prestige and power. At the same time, children usually won't discuss succession plans for fear of sounding greedy or disrespectful.
But death is inevitable, and if you want your company to continue operating, it makes sense to draw up succession plans well in advance.
But to create a viable plan, entrepreneurs must first learn to separate their business goals from their family values. That means running the firm according to sound business principles, and not to provide life-time cash and employment for way-ward sons and daughters.
"I've seen shipper/receivers making $100,000 a year because they're family," comments Albert Title, a partner with Toronto-based Orenstein & Partners Ltd., an accounting and management consulting firm that specializes in entrepreneurial companies. "The parents don't want to expose the child to the world, but it's unhealthy for the child, the family and the business."
Mr. Title notes that special treatment for some children breeds resentment among siblings, which explodes sooner or later. Family members, he stresses, must be paid according to the contributions they make.
Over-inflated salaries can also drag down the business. They create high overhead costs and make the company vulnerable to leaner competitors.
Secondly, entrepreneurs should formalize the succession with a writ-ten plan, complete with the family's business policies
The plan should distinguish between children who will manage the company and those who will play a more passive role. "Not all family members need control," observes Mr. Pervin. "Some can be given non-voting shares."
And of course, the document should name the founder's successor. That single step eliminates many of the arguments that invariably break out among family members after the founder is gone.
But when grooming a successor, entrepreneurs shouldn't necessarily look for a carbon copy of themselves, because every generation has a new way of doing business. Many entrepreneurs are good at starting up companies, but lack the skills necessary to manage an expanding work force.
For that reason, a level-headed son or daughter is often a better choice than one who might mimic the flamboyant style of the founder. To gauge these matters, it's helpful to get feedback about family members from objective observers such as lawyers, accountants and customers.
Entrepreneurs should also create policies to guide children into the company. They might insist that their children first gain some formal education, or obtain some business training elsewhere.
This helps to show the children that they have to earn their jobs. It also broadens their skills. "Some founders insist that their children first work for another firm and achieve two promotions," Mr. Pervin says.
As part of the plan, entrepreneurs must set a date for relinquishing control of the firm – and stick to it. But it's often beneficial for both founder and firm if the entrepreneur stays on in some capacity.
"You don't get rid of your best re-source," Mr. Pervin says. "The founder can stay on as a mentor and coach, but not to call the shots."