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The Globe and Mail

[an error occurred while processing this directive]Leadership crisis foreseen for family firms
A new study finds that more than half of the heads
of family-led companies expect to step down in the next decade.
Yet, most of these businesses have no succession plan in place.

 Monday, January 18, 1999
Elizabeth Church
The Globe and Mail

Brace yourself. Canadian family businesses are expected to undergo a major period of upheaval in the coming years, and most haven't done a thing about it, a new study says.

The culprit: succession planning.

Passing power from one generation to the next has long been the Achilles' heel of family enterprise. A Canadian study to be released today finds that more than half of the leaders of family companies expect to step down in the next decade and more than a quarter of them plan to do so in the next five years.

Yet the same study also reveals that most family businesses do not have a plan in place to deal with this eventuality.

That is "a recipe for disaster," says John Bowey, a Kitchener, Ont.-based specialist in family business with Deloitte & Touche, the sponsors of the study.

"A majority of these businesses are facing a leadership crisis," he says. "They have not planned well for the future, they are dangerously dependent on their current leaders and now, they are faced with losing these leaders through retirement."

This demographic disaster is even more impressive, given the consulting firm's calculations that family businesses account for approximately $1.3-trillion in sales each year in Canada and employ 4.7 million full-time workers and 1.3 million people on a part-time basis.

Mr. Bowey says those numbers are most likely conservative estimates, because they are based only on incorporated companies with annual sales exceeding $1-million.

"These businesses in the Canadian economy are so significant," he says. "It's really causing us to say this is a problem not only for family business, but for the national economy."

Despite the role of family companies in the economy, the study found that most are extremely dependent on a single leader and are woefully weak when it comes to planning in all areas, not just succession.

Three-quarters of family firm leaders who took part in the nation-wide survey said they believe the continued success of their business depends on them and 44 per cent believe their company may not survive without them.

Less than half reported that they had written business plans and less than one-quarter have a long-term strategic plan.

Mr. Bowey says he finds the figures quite surprising, especially given the size of the companies involved. Half of all firms in the study reported annual sales of more than $3.2-million and 57 had revenue exceeding $25-million. One had sales of $4-billion.

"That 75 per cent had no business strategy in this day and age is amazing," Mr. Bowey says, warning that planning is essential in order for a company to survive and prosper under its current leader, as well as when that person steps down.

That kind of warning hits home with Darlene Teske. A year ago this month, her father suffered a heart attack that forced her family to implement some of their succession plans.

"We thought at the time we were very prepared," says Ms. Teske, who has worked for the family company, Edmonton-based Diversified Steel Products Manufacturing Ltd., since she was a teenager. "But you have to put your game plan to the test to know if it is going to work."

On the surface, it looked like the Teskes had done all the right things. The family had sought outside advice on the issue and were active members in the Canadian Association of Family Enterprise, a group that offers networking opportunities and education programs for family businesses.

Still, when their father was suddenly unable to come to the office, his children found that several issues were unresolved, including the areas of responsibility for Ms. Teske and her brother Ronald.

A year later, Richard Teske, now 64, is back on the job as president, but is taking more of a statesman-like role, visiting customers and endorsing the leadership of his children, his daughter says.

Ms. Teske and her brother have taken the title of vice-president and have developed clear lines of responsibility. She handles corporate operations. He heads up production.

There are still issues to be resolved, she says, but things are much further along.

Her advice to other families: It's not enough to develop a plan. You have to test drive it to know whether it will work.

But even making a plan is more than most Canadian family businesses can muster.

According to the Deloitte & Touche study, nearly two-thirds of them do not have written contingency plans regarding the death of their leader, and even fewer have a strategy to cover a disability or major illness such as the Teske family experienced. More than half said they have no established process for picking a successor.

Ms. Teske says her family benefited from the fact that all the family members were familiar with the workings of the business.

The study indicates that this also is not always the case.

Only 60 per cent of respondents said they discussed business issues frequently with their spouses and only 41 per cent said they involved their children in these sessions.

The researchers conclude that this makes these ventures "extremely vulnerable" to shifts in leadership that are bound to happen when their leaders retire or are removed from the picture because of illness or death.

Mr. Bowey notes that one other surprising finding in the study is that 43 per cent of respondents said it was not important that their business remain in the family. But he adds that plans to sell are no excuse for neglecting long-term strategies, since any business is more likely to succeed -- and command a higher price -- if it is not dependent on a single individual and has planning processes in place.

"Regardless of the outcome, [not planning] is not good for the company, it's not good for the Canadian economy, it's not good for the communities in which [family firms] operate."

The study's findings are similar to a U.S. survey that was published in the Harvard Business Review last year. In that article, the survey's director also warned of a crisis in family businesses because of a lack of succession planning.

That study, involving 3,000 companies, also found that half of them expected a leadership change within 10 years, and that most had no plans in place.

While a sizable portion of family business leaders are nearing retirement in both countries, the Deloitte & Touche study found that Canadian firms tend to be younger. Two-thirds of the family-owned businesses in the study were founded after 1970.

The Canadian findings are based on responses to a 10-page survey mailed out to family-owned companies last May. The survey was conducted by the Deloitte & Touche Centre for Tax Education and Research at Ontario's University of Waterloo.


Just what does the average Canadian family business look like? Here are a few facts to consider, gathered from a Deloitte & Touche-sponsored study of more than 750 family companies: 

Most businesses (66 per cent) have first-generation owners. Only 2 per cent have passed through four or more generations. 

Ownership tends to be concentrated in a few hands, with only 6 per cent of the sample reporting more than six shareholders. 

Half of the companies employed 18 or more full-time workers

Most (77 per cent) estimated the value of their business at $5-million or less. Only one in four have a formal valuation to support this. 

The year most often cited for starting a business was 1986, and half of the companies in the sample have set up shop since 1978. Only nine traced their origins to before 1900. 

Close to 70 per cent of respondents were 45 years of age or older, and 7 per cent were 65 or older.

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