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Source: Small Business
Management 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.
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Choosing A Successor In A Family Business - Top
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.
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Choosing A Successor In A Family Business - Top
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 nonfamily 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
semiretirement. 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.
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Choosing A Successor In A Family Business - Top
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 nonfamily 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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Choosing A Successor In A Family Business - Top
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