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Choosing A Successor In A Family Run Business

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Choosing A Successor In A Family Business

Succession is the transferring of leadership to the next generation. It is a process rather than an event. While there is a time frame within which the transition will occur, the actual amount of time taken for the process is arbitrary. It will depend on you, your family and the type of family business you are in. This is a difficult process for most family businesses. The failure to face and plan for succession has been termed the "succession conspiracy" by Ivan Landsberg. He cites a number of forces that act against succession planning:

Founder

  • Fear of death.
  • Reluctance to let go of power and control.
  • Personal loss of identity.
  • Fear of losing work activity.
  • Feelings of jealousy and rivalry toward successor.

Family

  • Founder's spouse's reluctance to let go of role in firm.
  • Norms against discussing family's future beyond lifetime of parents.
  • Norms against "favoring" siblings.
  • Fear of parental death.

Employees

  • Reluctance to let go of personal relationship with founder.
  • Fears of differentiating among key managers.
  • Reluctance to establish formal controls.
  • Fear of change

Environmental

  • Founder's colleagues and friends continue to work.
  • Dependence of clients on founder.
  • Cultural values that discourage succession planning.

Overcoming the forces against succession planning requires the commitment of the family and employees of the business.

Succession occurs in four phases: initiation, selection, education and transition. A discussion of each phase follows.

Initiation

The initiation phase is that period of time when the children learn about the family business. It occurs from the time the children are born. A child can receive either a positive or a negative impression of the family business. If parents bring home the negative aspects of the business, complaining about it and about employees and relatives, the children will view the business in a very poor light. Other ways to destroy children's interest in the business is to be secretive about it or to convey an unwelcome or a hands-off attitude. There are families in which children are welcome to join the family business, but no one has told them so.

Owners are often cautious about systematically conditioning their children to enter the family business, an attitude that stems primarily from their awareness of individual differences and their belief that their children should be free to select a career path. If you do want your children to enter the business, or at least have that as a career alternative, there are some steps you can take to initiate them into the firm. The first step in motivating your children is to be certain that is what you want. Your lack of conviction about their involvement will be communicated to them. This may be interpreted as doubt about their ability, about the viability of the business or about the potential of the parent-child relationship to survive the strain of succession. Any of these situations can cause your child to lose interest in the business.

Assuming your children know that you want them to enter the business, you should talk with them often and openly about it. Be realistic, but stress the positive aspects. Your business provides you with many positive experiences to share with your children. Your children should learn what values the business represents, what the business culture represents and where the business is headed.

Selection

Selection is the process of choosing who will be the firm's leader in the next generation. Of the entire transition process, this can be the most difficult step, especially if you must choose among a number of children. Selecting a successor may be viewed by siblings as favoring one child over the others, a perception that can be disastrous to family well-being and sibling harmony. Owners select successors on the basis of age, sex, qualifications or performance. Because of the potential for emotional upheaval, some owners avoid the issue entirely, adopting an attitude of "Let them figure it out when I'm gone."

Nevertheless, there are several solutions to this dilemma. Assuming you have more than one child who is or can become qualified for the position of president, you can select your successor based on age. For example, the oldest child becomes the successor. Unfortunately, the oldest may not be the best qualified. Placing age or sex restrictions on succession is not a good idea.

Alternatively, you could have a "horse race." Let the candidates fight it out, and the "best person" wins. While this is the style in some major corporations, it is not the best option for all family businesses.

Family business owners may want to take advantage of a successor selection model developed for corporate executive succession. In this model, family members, using the strategic business plan, develop specific company objectives and goals for the future president or chief executive officer. The job description includes the requirements for the position--such as skills, experience and possibly personality attributes. For example, if a firm plans to pursue growth in the next five years, the potential successor would be required to have a thorough understanding of business valuations and financial statements, the ability to negotiate and a good relationship with local financial institutions.

Designing such job descriptions provides a number of benefits. First, it removes the emotional aspect from successor selection. If necessary, the successor can acquire any special training the job description outlines. Second, it provides the business with a set of future goals and objectives that have been developed by the whole family. Finally, the founder may feel more comfortable knowing objectives are in place that will ensure a growing, healthy business.

If you have an outside board of directors, you may want to solicit their input regarding successor selection.

Education

Training or educating the successor in the firm is a delicate process. Many times a parent finds it difficult to train a child to be successor. If so, an alternative trainer may be found within the firm. A successful trainer will be logical, committed to the task, credible and action oriented. These attributes, when tied into a program that is mission aligned, results oriented, reality-driven, learner centered and risk sensitive, will produce a well-trained beneficiary. All of this, of course, is easier stated than accomplished.

A training variant of the management by objectives (MBO) concept is the training by objectives (TBO) concept. This concept can be an effective method for providing both the training for and the evaluation of successors. In the TBO process, both the trainer (you or a non-family manager) and the trainee (potential successor) work together to define what the trainee will do, the time period for action and the evaluation process to be used. This system allows the successor to be placed in a useful, responsible position with well-delineated objectives. It also provides for steps of increased responsibility as goals are met and new, more rigorous goals are established. It is important that the successor enter the firm in a well-defined position. Instead of entering the company as "assistant to the president," which requires that he or she follow the president around all day, the successor (or any other child) should enter with a specific job description. In a small business this is very difficult because everyone is usually responsible for all tasks. Nevertheless, the successor cannot be evaluated effectively if he or she is not given responsibility and authority for certain tasks.

Your business will enable you to determine which criteria are necessary for good training. Usually, an owner wants to assess a successor in the following areas:

  • Decision-making process.
  • Leadership abilities.
  • Risk orientation.
  • Interpersonal skills.
  • Temperament under stress.

An excellent way to assess these skills is to let the successor give his or her insight on a current problem or situation. This is not a test and should not be confrontational. Instead, solicit advice and try to determine the thinking process that is generating your successor's suggestions. For example, you may be faced with a pricing decision. Give the successor all the information needed to determine whether or not to raise prices, then sit back and listen. Ask questions when appropriate--these should be "Why?" and "What if?" After the successor is finished, say "I was considering. . . ." This way each of you can learn how the other thinks and makes decisions.

It is possible that your leadership style differs from that of your successor. Your employees are used to your style. If your successor's style is very autocratic and uncaring, your company is going to experience problems.

Potential successors should be introduced into your outside network (e.g., customers, bankers and business associates), something many managers neglect. This will give everyone time to get to know your successor and allow the successor to work with business associates and bankers, and to get acquainted with customers.

Transition

The actual transfer of control to the successor occurs when you retire. Research indicates that transitions are smoothest when

  • They are timely.
  • They are final and do not include the entrepreneur's participation in daily activities.
  • The entrepreneur is publicly committed to an orderly succession plan.
  • The entrepreneur has articulated and supervised the formulation of company principles regarding management accountability, policies, objectives and strategies.

The transition can be effected gradually by relinquishing more and more responsibility to the successor. One expert advises the entrepreneur to take a number of planned absences before actually relinquishing control. Let the successor see what it is like to manage the business alone. Also, this allows you to see that the business is not going to fall apart without you.

Once you announce your retirement date, do not rescind it. There is no such thing as semi-retirement. By the time your children are in their 40s, they expect leadership roles in the firm. If you refuse to let go, they may leave.

Letting Go

There are many reasons why entrepreneurs cannot let go of the family business. Primary among these are financial ones. As a business owner, you may be used to a large salary and benefits, such as a car or insurance. After working hard in the business most of your life, you want your retirement years to be comfortable, not filled with financial anxieties. There are several ways to ensure your financial security after retirement. Business owners usually consider either taking what they need from the company after they retire or arranging a buy-out that will give them the needed liquidity without placing an undue financial burden on the company. If you don't sell the company and your financial security is contingent on its daily operations, you will be less likely to retire completely. Your successor needs full control, and you probably won't let that happen. Also, the company may not be able to support you and the successor and still pursue the strategy you have set for it. Finally, you may not be able to meet your financial goals from income generated by the company.

To avoid these problems, consult with a financial planner or an attorney to determine the method of transfer that is best for you. There are tax consequences to the outright sale of the business to your children. Also, an outright sale may burden the company with too much debt. Other alternatives include an installment sale or private annuity, or funding a buy-sell with insurance proceeds. To provide effectively for your retirement, seek professional assistance in this area.

There are other reasons why the entrepreneur doesn't want to let go. One of the primary reasons is the fear of retirement. To understand this fear, it is necessary to appreciate the relationship between work, the meaning of life and social evaluation. For many founders, work and the business are synonymous with a meaningful life. The intense involvement the entrepreneur has with the business increases the importance of the job and his or her identity. Removal from work is like losing a part of oneself. Work is important to the entrepreneur because it provides:

  • Economic returns.
  • Opportunities to contribute to society.
  • Status and self-respect.
  • Social interaction.
  • Personal identity.
  • Structured time.
  • Escape from loneliness and isolation.
  • Personal achievement.

That's a lot to ask someone to give up. Especially important is the loss of status and social power. The leader of a firm wields a great deal of influence and enjoys public impact and public exposure. Retirement means giving up this power. Because this loss is unpleasant, it is not uncommon for a founder to give a successor the responsibility for running a firm and still try to retain power and privileges from a position on the board of directors.

The entrepreneur who successfully lets go has:

(1) a sound financial plan for retirement,

(2) activities outside the business that can provide social contact and power,

(3) confidence in the successor and

(4) a willingness to listen to outside advisors.

Board of Directors

Most small businesses do not have a board of directors, but a board can be invaluable during the succession process. A board can help management determine objectives and strategies, provide specialized expertise and even arbitrate feuds among family members.

The board is usually composed of both insiders and outsiders. Although family businesses usually are operated in a very private manner, there are benefits to making outsiders board members. They come with different backgrounds and perspectives, and provide checks and balances. Outside directors don't work out well if they lack knowledge about the firm and its environment, or if they are uncommitted to board responsibilities.

If you decide to develop a board, you should be totally committed to the process. There are difficulties associated with boards (time and money) and the entrepreneur must be willing to make the board a viable entity.

The first step would be to establish goals and objectives for the board. You should set these objectives before you recruit or make a commitment to any members. Boards can expand your network, provide input into the succession process, judge the successor's progress or help determine a transition date. But boards should not get overly involved in operational or day-to-day issues.

The second step is recruiting. A board should have five to seven members, including three or four outsiders. Select them carefully. You can find them in civic and charitable organizations, among acquaintances and at local universities. You should know and have a good rapport with prospective members, and you should determine their ability to provide concrete advice and direction for the business. The following are a few good questions to ask:

  • What is their background?
  • How are they thought of in the community?
  • What do your present directors think of them?

Make sure they have the qualifications to help realize the goals and objectives you have set. The remainder of the board is composed of top insiders. Your potential successor may be invited to attend the meetings, or you may choose to make him or her a member of the board.

Making Succession Work

To make succession work, you must communicate. This is the key ingredient. Use the family retreat as well as family meetings. Family meetings can educate the family in discussions about the nature of the firm, the kinds of leadership skills needed, entry and exit conditions, decision-making policies and conflict resolution procedures. Casual conversations about these issues can contribute to your formal planning later on.

Family meetings do not have to be formal affairs, but they should occur regularly and have an agenda. Parents don't have to lead the meeting; have the offspring organize and conduct a portion of the meeting. Use the meetings to defuse any potential time bombs.

Anticipate problems. Will there be any problems with non-family members? If so, which ones? How will they be a problem, and what can you do (short of firing them) to handle it?

Sibling rivalry is another problem to consider. Does it exist? If so, how will you resolve it?

It may not be a problem until the successor is named. Develop a code of conduct for sibling relations. This code will outline how siblings must act toward each other (i.e., in a way conducive to a healthy business), including how to work together, how to play together and how to keep spouses informed about what's going on. Anticipate problems that may arise and meet them head on.

Summary

Succession is a process that may extend from three to six years or longer depending on your age and on your successor's age. It occurs in phases. Over a period of time, you initiate or educate your children to the family business. After determining a successor, you develop a plan to transfer leadership in the family business. The decision to announce who the successor is and when the transition will occur depends on the family.

There are benefits to making an early announcement, including (1) reassuring employees, suppliers and customers, (2) allowing siblings time to adjust to the decision and to make alternative career decisions, if necessary, and (3) enabling the entrepreneur to plan for retirement.

The fundamental goal should be to pass the family business successfully to the next generation. To do this you must feel financially secure, secure with the company's future goals and plans and secure with your successor.

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