Formally handing over control of a small private business is usually the moment when owners can step into retirement, assured that the financial future of their company is in capable hands. Yet new data shows nearly half of founders surveyed fear the next generation isn’t sufficiently prepared to take over, leading less than quarter to have established formal succession plans.
Those were the top findings of an annual survey by private investment bank and financial advisory firm Brown Brothers Harriman (BBH), which sounded out nearly 500 family-owned and privately owned companies. With 76 percent of respondents saying they had no formal succession plan or were only in the process of working one up, the results reflected the strong hesitations of many founders and current owners about passing their businesses to the next generation. Nearly 50 percent of participants described the family cohort that’s first in line to take over their businesses as being only “somewhat prepared” to manage its finances and operations, with 40 percent saying the next generation isn’t at all ready to shoulder the responsibilities involved.
As a result, only 38 percent of company owners said they’d been entirely open and transparent to next-generation family members about their plans for passing along their personal wealth and business holdings. In some cases their hesitancy — or aversion to prepare for succession at all — was simply because current leaders were too busy or lacked a sense of urgency to do so. But other reasons they cited offered insights into the sensitivities and worries frequently involved in handing over a business.
Top concerns that prompted owners to remain somewhat or entirely vague about their succession plans included not wanting disrupt family dynamics, and an aversion to revealing their intentions before the right time.
Others were based on fears that designated successors wouldn’t continue working as hard and earning their keep once they’d learned of transmission plans, as well as worries that inheriting too much money would undermine the new leader’s dedication to and industriousness in the business.
“Some owners fear that talking about wealth too soon may spark entitlement or anxiety instead of instilling gratitude and responsibility,” said BBH principal Ali Hutchinson in comments accompanying the report. “Starting early and tailoring these conversations to the age and maturity level of each family member can make the eventual transition smoother and more natural. This ongoing dialogue helps instill values, trust, and confidence over time.”
Despite those hesitations, nearly two-thirds of respondents said they intended to transition company ownership to the next generation — at some point, anyway. Another with another 8 percent of participants said planned to have managers or employees to take control. But if leaving the business to children, close relatives, or chosen subordinates was a foregone conclusion for a majority of owners, many still expressed reservations about formally establishing and announcing those plans.
Resondents cited potential family strife or other anticipated negative reactions most frequently at 46 percent of the time, with the lack of seeing a clear, single successor as another top response. Others included leaders’ own emotional reluctance to step away, and probable tax consequences as explanations why current owners hesitated to establish and reveal a firm exit strategy.
According to BBH partner Kathryn George, those concerns are often further reinforced by the doubts business owners have about their natural successors being up to the task. In some cases, they may even inspire leaders to skip a generation, and transfer their company to younger family members they see as better equipped to assume the responsibilities involved.
“Succession planning remains one of the biggest vulnerabilities for private businesses, and a large part of that often stems from worries around successor readiness,” George said. “Owners may know who of the next generation they’d like to take over, but how can they know when the next generation is ready?”
Awaiting their eventual exit, a large majority of owners said their main focus remains building their business further, and leaving it as strong as possible for successors when they do hand it off. Over 77 percent of respondents said growing their company was their top capital priority, surpassing expansion of equity stakes for leaders who shared ownership, or increasing dividends they benefit from in a multi-party proprietary structure.
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Bruce Crumley
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