The process gives you the opportunity to take your company to the next level as well as the next generation.
By Ellen Frankenberg
When more than one child works in the family business, succession dilemmas can keep parents awake at night. Does Tom, the creative nonconformist, have the right kind of energy to lead our company in a new direction? Or should we choose Brittany, the loyal, diligent worker who could run our operations much more efficiently?
Since no one can actually “replace” Dad (and no one would be foolish enough to try to run the company his way), perhaps it’s better to lift succession discussions to a new level. What new strategic initiatives will succession planning generate? How will the company be reinvented when the next generation succeeds?
Here is some advice to help a family make succession decisions that will affect all the siblings.
1. When choosing a successor, start by asking what’s best for the business. Is the family’s talent pool deep enough? The skill set required to lead an $80 million company is entirely different from the talent needed to build a company from scratch. The right skills for every occasion are not necessarily found in the family’s DNA. If no family member has the right stuff right now (even if that was your dream), it’s time to begin a search both within and beyond the company. Even if a non-family CEO leads the company, the family can retain ownership and future options. If your offspring don’t have what it takes to lead the company, they’ll probably be relieved when you announce this decision.
2. Consider where you want your company to be by 2027. Your strategic business plan may take you only three to five years forward, but consider the future in generational terms. Do you want the company to be there for your children’s children, or are you building it to sell it? Your strategic initiatives—and the kind of leadership required—will differ dramatically depending on your answer.
3. Preparing a company for succession or sale requires the same due diligence. The succession planning process should include a performance review in management, sales, human resources, systems, financial management and strategy, as if you were preparing the company for market. Especially if your successors will be buying stock, or leveraging their ownership through sweat equity over time, they are entitled to the same kinds of information or valuation that an outside buyer would expect.
4. Involve the family members who will make future leadership decisions. Succession planning provides an opportunity for a family conversation to see who shares the same vision. Siblings and cousins know each other in a way that parents never will, and their input is critical, especially because they will live for years with the consequences. Even if the one with the most voting shares makes the final decision, the next generation will support future leadership much more readily if they have had their say. Building consensus before naming the next CEO, perhaps in the context of a family retreat with the help of a facilitator, can contribute to a seamless transition.
5. Determine your criteria for leadership. Rather than starting with the choice between Tom or Brittany, consider first which competencies will be required to take your company to the next level, given the prospects of your industry, your region and your product line or services. Do you need a technical innovator? A sales whiz? A financial analyst? A team builder? A turnaround specialist? A marketing genius? An operations manager? All of the above? A 1998 study of Canadian family businesses (since replicated by James J. Chrisman, Jess H. Chua and Pramodita Sharma) found that the most important criteria for family business successors were integrity and commitment to the business. Trust matters.
If you are transferring your company to a group of successors who will be partners, encourage them to develop a partnership agreement—not a legal document, but a written outline describing how they will communicate, what information they will share, how they will manage conflict, who will lead in which circumstances, who will be accountable to whom, etc. Prevention matters, too.
6. Consider a term of office. Only the pope, U.S. federal judges and family business successors are appointed for life. The average tenure for the CEO of a major U.S. corporation is now about five years, down from a long-term average of ten years, according to Leslie Gaines-Ross of consulting and communications firm Burson-Marsteller, quoted in USA Today. When a company moves from a casual, informal culture in which Dad made all the decisions to a professionally managed corporation, systems of accountability must be implemented. CEOs ordinarily report to a board, which includes outside business leaders, that reviews performance and challenges management to reach new strategic goals. Establishing annual professional reviews, or a term of office, will help other family members relax about the leadership choice, motivate younger successors to advance and offer the successor CEO the opportunity to exit gracefully and pursue other dreams.
7. Focus on many successors and many opportunities. When several siblings or cousins are employed in the business, each must find a niche. This could be sales or IT or maintenance—not necessarily the administration of the whole company. If the company is in an acquisition mode, opportunities for leadership in a new division or product line will develop. The talents of the next generation can generate unexpected opportunities to grow the business.
8. Use-state-of-the-art assessment tools. Many family business successors have never worked anywhere else, and have never competed against their peers at the national level. Inventories that measure business competencies—time management, task completion, conflict management, sociability —provide parents with data to support their intuition about which of their children will become the best president. The Devine Inventory or Assess can be taken online in about a half-hour; written reports provide a comprehensive analysis, comparing several successors with their peers. Sometimes the potential of the youngest daughter pops out in such an inventory, even though her older brothers ordinarily are in the limelight. Problem areas can also be identified, so they can become part of an individual development plan.
9. Create individual development plans. Often the “old hands” around a company know things about the owner’s son that the owner doesn’t. In addition to sophisticated online inventories, it makes sense to use a 360-degree inventory. This assessment tool measures job performance through feedback from those who work most closely with the candidate—supervisors, subordinates and peers. Especially if any family member ever needs to be dismissed, a 360 assessment is critical. If the person is a potential successor, the 360 provides practical information for developing a written plan for growth—an individual development plan. Does the candidate need to improve people skills? Technical knowledge? Financial literacy? Anger management? If his experience has been in purchasing, in what sequence should he learn about production, sales, finances? Who will mentor him? Does he need an executive development course or an MBA? When will he be ready to manage a new product line? One department? The whole company? How will his progress be reviewed?
10. Succession happens on three levels. Successors must take over not only management, but also ownership and knowledge. Sometimes for tax considerations, the senior generation starts distributing stock to each of their nine grandchildren, without thinking about who will control the company. The eventual CEO may end up with one-ninth of the stock, which minimizes her authority significantly and requires a whole new kind of collaborative leadership. Equal isn’t always fair. Perhaps other assets, like real estate or stock, can be willed to other heirs so control of the business remains with those who will lead it. Sometimes the toughest aspect of succession planning is the transmission of knowledge—telling successors how much the company is worth, which advisers have recommended what and which key customer relationships must now be shared.
If all this seems complicated, that’s because the ability to perpetuate the hard work and success of previous generations depends to a great extent on decisions about succession made now. Strategic succession planning provides an opportunity to take your company not only to the next generation, but also to the next level. Most of us get to make this kind of decision only once. Your Golden Goose, which supports so many families, depends on the wisdom of your choices now.
Ellen Frankenberg, Ph.D., has been advising entrepreneurial families for more than 20 years (www.frankenberggroup.com).