Question

By referring to examples, discuss the main problems associated with succession planning in family businesses

Answer 1

Succession planning means passing the ownership to the next generation. In the US there are many family owned private companies.Even though these businesses plan to pass there ownership to the next generation, in majority of the cases the plan fails.These businesses face many problems and the success rate is very less . This is due to the fact that there is no planning on the part of the first generation owners of business. The first generation owners do not want to plan to pass their business to their children because of the fear that they will have to make uncomfortable decisions.Moreover external forces also may threaten their plan.Succession plans may be unsuccessful because of reasons like unexpected economic slumps. During recession ,the banks refused to give loans to private business and private owners had to put their own wealth in business.As a result many owners could not take retirement.In such circumstance ,instead of passing the business to their children , owners may have to sell their business to other buyers.Sometimes the children may have liquidity to purchase the shares of the business but in many cases they do not have fund.As for eg a survey in 2012 which was done by Price water house coopers shows that many family business owners did not have fund to purchase the shares of the company from another family member. The owners of business often find that their children do not have proper education or skill to run family business. When the successors are not efficient to take management work, outsiders may be hired to play the role and conflict might arise with the outsider and family members in the business.Succession planning requires tax planning . Proper planning should be done to reduce the tax liability of the next generation otherwise the next generation may sell off some assets of the family. Sentimental attachment to family business also cause conflict between managers from outside and family members.This has negative impact on family owned business.