Tactical Hints For Succession Planning For Family Businesses
Starting Sooner Offers More Options To The Family Business Owner.
Don Schwerzler Popular
The sooner the succession planning process is started the better, and you will have more options. Another advantage: options, such as buying life insurance to fund the stock ownership transfer, tend to be less expensive when the owner is 45 versus 65.
A child may have the right to inherit the business, but the right to manage the business must be earned. Urge your children to work at least two years outside the family business so they can learn different skills and experience making mistakes.
Establishing an outside Advisory Board to help manage the transition allows trusted non family business professionals to help deal with the tough issues. This advisory board is constructed differently than a board of directors and can be a very cost effective vehicle for bringing good advice and experience from outside.
Conducting formal family meetings can help solve problems while they are small. Having experienced family business consultants like Family Business Experts lead the first few family meetings can help establish and keep the family focused on the rules, goals and objectives.
Develop non business interests.
Develop financial resources that are independent of the business.
The best succession plan might be to sell rather than transfer. Sometimes, with family businesses, the focus is so much on succession that the most logical alternative is completely overlooked.
If the family strategic plan and the business strategic plan have been done, we see two situations where selling is the best alternative.
The business can't evolve with the changing conditions or environment. This inability to evolve might occur because it can't find the right people or because technology or environmental factors necessitate capital investment or expenditure beyond the ability of the family / business to raise capital.
The business has not been able to find and develop a competent successor.
It is not easy for a family and business to objectively face reality in either of these situations and there is the stigma of "defeat" or "quitting" that is often associated with a decision to abandon a goal. But the harsh reality is that in either of these situations, failure is almost certain and will happen even if the family decides to ignore reality and try to continue with the business / transfer. So, failure becomes a matter of when not if.
In either case, early and realistic recognition will let the family sell the business rather than lose its investment and at least have the proceeds to carry on their goals in other forms.
Evaluate a competent successor
This starts with the key elements in the succession planning process where the family and the business identify the culture, mission and strategy, and who they need to lead them to fulfill the mission. This process will naturally identify skills and competencies and these should have been built into job descriptions and development plans for the successors. The successor's progress in meeting and developing skills and competencies should therefore be extensively measured and documented by many people throughout the organization on a regular and continuous basis.
This evaluation process can be extended beyond just immediate supervisors within the business - the Advisory Board and customers and suppliers can also be incorporated into an evaluation process.
Less objective and more difficult to measure, but critically important, is to evaluate how the potential successor handles leadership and power. In a nutshell, can s/he take over the reigns of power and provide leadership that will be accepted by the organization and by the family. This is tricky to test and evaluate.
If the outgoing CEO shelters the potential successor, and decrees the authority, the successor isn't tested against the "yes men" who are passive and accommodating - until after the outgoing authority is gone - then they rise in opposition to thwart and block the previously sheltered successor.
At the other extreme, the "shark tank" approach turns two or more potential successors loose in the business and lets them fight it out.
Either approach can be devastating to the business and neither offers any realistic prospect that a suitable successor will survive. [The sheltered successor might well not toughen up under pressure; sharks don't necessarily make good leaders.]
A realistic outgoing CEO and family often seek the help of outside advisors or an Advisory Board to ensure that the job rotation and/or special assignments for the successor include situations where s/he will have to seize or assert some authority to be successful. Over time, the successor will have built a solid power base from within rather than just being handed power.
Perhaps even more difficult to measure, but critically important, is motivation. Does the potential successor really want to assume control? S/he might want the job, even really want it passionately, but for reasons such as being the eldest, for the power or prestige it might bring them... or for any number of other reasons... but is it really what they want to do?
Fairness = equal performance expectations
In the obstacles to succession, we noted that parents often felt that fairness meant giving each child an equal share of the business when they might not have contributed equally to developing that business.
Another aspect of fairness is in the area of performance expectation. Unless children earn their position on the basis of merit, unless they are expected to be accountable for their performance in the business just like any other employee, it will not be possible for them to effectively assume leadership after a succession / transition. So we have found that a key to success is to set the standard for performance and accountability from the earliest involvement.
Less frequently, a parent sets the standard much higher for family members rather than lower and we have found this to be just as much of a problem.
Set a standard for the business - family members must leave family behaviors at home and act like an employee. [Work outside the family business for part of one's career really helps here to show the standards of behavior that other organizations set.]
Graduated retirement... but set and stick to a final date!
As the time for succession approaches, take longer and longer absences - both for the outgoing CEO to get used to being away, for the opportunity they offer to evaluate the potential successors, and for the organization and its customers and suppliers to get used to the fact that it can operate under the planned new leadership. But announce and stick to a date of withdrawal / succession.
As for the "outgoing" person having a continuing role, we have seen this happen admirably - and we have seen it fail spectacularly! The key to success is clarity and self discipline. If an ongoing role is agreeable, define its role, responsibilities, authority and accountability like any other job. Stick to those parameters and make sure that everyone knows that is all you are there for!
Use some [or maybe even all!] of these tactical hints to help your family business prepare for and successfully make it through a transition of leadership.