The purpose of this chapter is to investigate the in-depth experiences of succession planning on the performance of family-owned small and medium enterprises (SMEs) in Sri Lanka and understand the reasons behind the failures of succession planning and how to overcome them. Drawing from in-depth semi-structured interviews with 10 (ten) Sri Lankan owners in private logistics sector were selected as the participants while employing the Leader-Member Exchange (LMX) theory to evaluate the viewpoints. The findings revealed that trust, loyalty, respect, and obligation are paramount important to the succession while lack of discipline, lack of practical knowledge, lack of self-awareness, lack of mental strength, lack of commitment given are found to be the main reasons for failures. Hence, mentorship, clear communication of expectations, freedom to follow in their parents' footsteps and allowing them to find their own passion within the business, encouraging the modern generation to gain practical experience can immensely aid in overcoming the challenges.
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To enhance organizational growth both locally and globally; succession planning contributes largely by preparing new leaders for the businesses. There are two main types of ownership structures in the business sector namely, family firms and non-family firms. Family businesses are organizations that are owned and handled by the members of the same family for numerous generations (Miller et al., 2008). Succession planning in family-owned SMEs is associated with the transfer of ownership and management to the next generation which is largely caused by a lack of talent management, reward management, career development, training, and development of potential successors (Akpan & Ukpai, 2017).
Effective succession planning is essential for the long-term success of family-owned SMEs, and it demands careful preparation, communication, and cooperation among family members. Non-family enterprises, on the other hand, may have access to a larger capital pool and more professional management knowledge. Thus, non-family enterprises may be less vulnerable to family dynamics and have a more formal structure that facilitates clear authority and decision-making lines (Camison, et al., 2016).
SMEs are recognized as a large part of the Sri Lankan economy, with over one million SMEs accounting for approximately 75 percent of all businesses. These are found in all sectors of the economy and are estimated to contribute about 45 percent of total employment in Sri Lanka (International Finance Corporation [IFC], 2020). Despite the positive impact it has on the economy, the endurance of family-owned SMEs is too short due to a lack of succession planning (Kellermanns & Eddleston, 2006).
Once capable and vibrant organizations had to shut down their operations at the death of their founders, due to a lack of adequate planning for succession (Ogundele, et al., 2012). In addition, it is an extremely timely topic since estimates have indicated that less than 10% of family enterprises survive to the third generation (Anon,2019). Around 43 percent of global family businesses did not have a succession plan in place, with just 12 percent making it to a third generation (Lanka Business Online [LBO],2017, as cited in PWC,2016). If a family-owned firm transition is not handled and planned appropriately, the economy will be at risk (Lee et al., 2003). Yet, it is worth noting that family-owned SMEs who embraced the combat and adapted to the altering environment outperformed their non-family competitors while uniting the family and the business through governance mechanisms and planning effective transition.