Plan the future of your family business wisely

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Plan the future of your family business wisely

As the recent significant shifts in their lives and enterprises continue to unfold, family CEOs may be considering retirement more seriously. So, what’s the next step? Is it the best idea to retain the company in the family? Is it better to sell to a new owner with a different, maybe more futuristic vision, one that has the ability to revolutionize the firm and uncover hitherto untapped prospects in the New Reality?

Pre-COVID-19, survey participants were asked about succession planning and emergency succession plans in the Successful Transgenerational Entrepreneurship Practices (STEP) Project 2019 Global Family Business Survey (PDF 20 MB), which was planned and developed through a strategic alliance with KPMG Private Enterprise. Because the unexpected occurred, follow-up interviews with family business executives were undertaken in the late spring and early summer of 2020 to see how COVID-19 influenced their perspectives on succession planning and governance.

Some of these family CEOs were personally exposed to the importance of having a leadership contingency plan in place after experiencing the direct effect of an unanticipated health catastrophe. This experience had prompted them to think about and expedite longer-term succession planning in order to ensure that their firms would be well-managed in the future.

Succession planning needs work

The current status of succession planning, according to the STEP Project 2019 Survey, requires a lot of improvement. Seven out of ten family business CEOs polled do not have a succession plan in place, while 47 percent do have an emergency succession plan in place in case of unforeseen circumstances. This distinction means that some CEOs’ present intentions or opinions on the longer-term course for their firms may not be reflected in emergency succession plans, however this is expected to change as a result of COVID-19’s new approach.

According to the poll, 45 percent of family company executives feel that the firm should be kept in the family. This, however, is not true for every age. CEOs from the Baby Boomer and Silent Generations are more likely than CEOs from Generation X or Millennial generations to assume that the future CEO will come from the family. Regional differences are also interesting: According to the STEP Project 2019 Survey, the number of CEOs who feel their company will be managed by the family has climbed to 55 percent in Asia/Pacific and the Middle East/Africa but has declined to 33 percent in North America. According to a 2018 survey1, just 31% of small company owners in Canada prepared for the future.

How to choose the next leader?

To better understand the thought processes of those family CEOs who believe that a family member should succeed, the STEP Project 2019 Survey asked questions about how they would choose their successor. Nearly half (48 percent) said it would depend on the potential leader’s level of interest in the business, while 23 percent said they would choose the family member with the best qualifications. Globally, only 12 percent said they would choose the first-born son, although this number is higher in regions with a stronger tradition of primogeniture, primarily the Middle East and Africa (18 percent) and Asia and the Pacific (21 percent). Other options included leaving the decision in the hands of the board (11 percent) and putting the decision in the hands of an external search firm (1 percent). Overall, the responses clearly show that global family business CEOs value self-commitment and competence above all when selecting the next leader.

The STEP Project 2019 Survey also revealed interesting insights about the different paths that family succession might take. Not surprisingly, the most popular was linear succession, with 46 percent of family CEOs favoring transfer between a member of the current (parent) generation and a member of the next (child) generation. Other options included intra-generational succession, passing the business on to a CEO from their own generation (26 percent); discontinuous succession, skipping a generation and handing leadership on to the next (23 percent); and reverse succession, where the CEO from a younger generation is succeeded by a CEO from an older generation (5 percent).

There are generational distinctions here as well. Intra-generational succession was most common among business leaders from the Silent Generation, for example, while Baby Boomer and Generation X leaders experienced mostly linear successions. Interestingly, the majority of Millennial leaders achieved their role through a discontinuous succession.

Looking beyond the family

Sometimes the best succession plan means making a different choice, such as bringing in an outsider to run the company or selling the company outright. This course of action requires careful planning, not just to ensure a good price, but to set the company up with the best chance of continued success in a new incarnation. This often becomes particularly important to ensure that the essence of the brand survives, especially if it is tightly linked to the founder and the family. Family business CEOs who choose to sell their company don’t take this path lightly. However, many family businesses that are sold or merged with others may ultimately become more successful and be further along the path toward building greater family wealth.

In the end, family businesses must put succession plans in place, and do so sooner rather than later to anticipate what might lie ahead and succeed in our New Reality. As new generations enter the business, their priorities and vision will undoubtedly shift in order to take their companies forward. Selecting the next CEO based on criteria such as commitment and competence, and having an updated emergency succession plan in place, are all necessary steps for navigating through this journey.

In-depth interviews with family business leaders across the globe provided us with firsthand and profound perspectives on their succession plans and the factors affecting the performance of their family businesses. I encourage you to read their stories in a series of articles co-authored with the STEP Project Global Consortium to be published on the KPMG Private Enterprise website in October.