There is a silent crisis brewing in U.S. business that may be of epidemic proportions. That crisis is poor succession planning. I’ve seen many family-owned or -controlled businesses fall into the hands of
ill-equipped children or poorly trained executives -- or seen them liquidated or sold for less than they were worth when the first generation was at the helm —because of a lack of planning.

Evidence is strong that neglect of succession planning is a pent-up crisis waiting to happen. According to the Family Firm Institute, Inc., family businesses make up 80 percent to 90 percent of all businesses in the United States and have created almost 80 percent of new jobs in recent years. In fact, 37 percent of Fortune 500 companies are family owned, as are 60 percent of public companies. Family-owned businesses account for 60 percent of total U.S. employment, and more than 50 percent of the Gross Domestic Product.

It’s easy to see that these businesses play a tremendous role in our economy. But it’s not easy to explain why they fail to plan -- and by so doing, plan to fail. Among senior-generation family-business owners, the Family Firm Institute says 25 percent have not completed any estate planning other than writing a will. Yet, only 30 percent of family businesses survive into the second generation, 19 percent into the third, and 3 percent into the fourth.

Failure to plan is a problem that can’t be ignored, especially now. Due to changing demographics, we’re in the middle of the largest intergenerational transfer of wealth in the country’s history. The institute estimates that about 20 percent of family businesses have changed hands in the past five years and that in the near term, a substantial segment of closely-held and family-owned businesses will lose their primary owners to death or retirement.

Hello? Am I missing something here? Given the scope of family-owned businesses, doesn’t it seem that succession planning is kind of important? The lack of proper planning has far-reaching effects on the economy, the business community, employees, and customers. It’s time to wake up and smell the coffee, folks!

Why is succession planning lacking? First, consider the personality of the entrepreneur—a highly esteemed group to which I belong and so can speak of from personal experience. We entrepreneurs are extremely busy and focused on building our companies. Who has time to plan for some day far in the future? If you don’t outsmart the competition today, it will be a moot point anyway.

Also, as entrepreneurs, we are emotionally involved in our businesses. We’ve grown our babies from their infancies, led them through bumps along the way, and can’t abandon them now, when they need us most. Nobody knows the industry, the customers, and the employees as well as we do, right?

Some people have even gone so far as to say that entrepreneurs have big egos, but—they’re wrong! Besides, if I’m not “Mr. Company Man” anymore, I’ve lost my identity. Planning for a successor is admitting that some day I will be an old coot who doesn’t want to work or can’t for health reasons, or that I might keel over—curses!

These are big fears that people don’t want to talk about, according to Dr. Allen Bettis, an organizational psychologist and principal at The Legacy Associates, LLC, in Minneapolis. Senior business owners are focused on building their companies and can’t imagine life without their work, and the next generation is timid about pushing the issue. Bettis says family members are afraid to offend by asking tough questions like “When are you going to retire?” and “When can we plan for it?”

Business owners can also be paralyzed by what feels like a huge decision. “They fail to understand that succession planning isn’t a single issue,” says E. Burke Hinds, an attorney at Messerli & Kramer in Minneapolis who specializes in estate and business-succession counseling. He advises clients to break the decision into three parts -- control over voting shares, economic benefits, and management succession—to make the task less daunting. The results of a “too little, too late” approach to succession planning can be horrendous. Owners
who keep putting it off will “eventually reach an age where they can’t make a decision because they have too much invested, are too involved, and can’t imagine life without being Mr. or Mrs. Widget,” says Glenn Ayres, a partner at Fredrickson & Byron in Minneapolis and principal of the Family Business Alliance. At that point, he notes, the company has to be sold with little or no notice given to the second generation, who are depending on the family business for their own livelihood and the funding of college tuition for their children. Or the company limps along and passes through the estate, with interest distributed among siblings who may or may not want to be involved in the business.

Another problem can be in the transfer of equity from the business to personal uses. “Dad and Mom have lived off of a lot of peanut butter and jelly sandwiches over the years,” says Ayres, while they reinvested revenues in the company. Now it’s time to retire, and their equity is tied up in the family business. If they walk away with their equity, he explains, the business cannot survive with the resulting debt load. To their dismay, the senior generation’s success makes it difficult for the next generation to survive.

In Hinds’ experience, another source of dismay is realizing the impact that estate taxes will have when they turn the company over to successors. “Very few will ever admit that that’s the key reason,” Ayres says, “but the fact is that tax avoidance is the key motivator” for putting off succession planning.

Many CEOs fail to recognize that perpetuating a company beyond their tenure is just as important as building the company, according to Bettis, who adds that business leaders should make preparing a successor a major part of their everyday activities.

Ayres recommends that families begin with a dialogue about their vision of the future and their own entrance rules for the business -- education, experience, job evaluations. The company may have grown so much that it requires a different type of person to lead it into the future.

Next, they should discuss what ownership will look like in the next generation’s hands and build a strategic plan driven by the family’s vision and values. “Is it business first, meaning that it’s just about the money?” says Ayres. “Or, is it family first, meaning that family members can work there and family security is the most important thing?” Ideally, they find a middle ground, where the business satisfies the family interests, and work is merit driven, regardless of last name. Families also need to decide how much risk they will tolerate and whether equity should be reinvested or taken out to s upport family needs.

Bettis advises family-owned businesses to build a board of directors with outside leaders of other companies. These outsiders can bring to bear the objectivity family members don’t have and ask tough questions about succession. If the family chooses one of its own members as successor, an outsider should assess how well that person is prepared to run the business. “Sometimes Mom and Dad have a blind spot as to their son’s or daughter’s abilities,” Bettis says.

A development plan can ensure that a successor gets needed experience and training. Bettis’ advice is not to hire that person as CEO, but to first have him or her get experience as chief of operations so that the CEO can do additional grooming.

My comments are not meant to be exhaustive. Rather, my point is that too many business owners are making excuses for their lack of planning for the future, and this affects spouses, children, employees, shareholders, suppliers, and others. If you think this doesn’t apply to you, then you must be one of my rare immortal readers. But for the rest of us mortals, succession planning is something we need to do… today…now!