Family businesses represent a significant component of the American economy. Approximately 90% of businesses in the United States are family-owned. Many of these family businesses are successful and have been operated successfully within families for several generations.
However, as with any business that is passed down from one generation to another, some do not survive for various reasons, including lack of cohesive succession planning. How often have you asked a business owner this question: “Who will take over when you retire?” Their response may be something like, “Well, we’ll cross that bridge when we come to it.” This is the equivalent of not having a plan at all for your business.
Succession planning in family businesses can a challenging and complex undertaking. The oldest family business in the U.S is Avedis Zildjian Co. and they make cymbals, drumsticks, percussion mallets and other drum accessories. There were several generations when the handoff was not wanted or easy. And yet, they have the 15th generation of Zildjian family in the business now!
A successful succession plan ensures proper transfer of skills, knowledge, leadership, and ownership of products, services or assets, along with a minimization of the potential for family conflict and drama. Yet many family-run businesses are still failing to address this very critical issue, leaving themselves open to enormous amounts of risk.
Well-run businesses start thinking about succession well before they actually need one—and businesses that are not well-run never get around to planning for the future. A business that fails to determine who will take over when the owner retires, becomes incapacitated, or moves on will hurt its own future prospects.
I have a client who has been planning this succession to generation two for many years. The father started it and the daughter began taking over six years ago. They spent the time gaining the trust of the employees, growing her knowledge/skills/abilities, and structuring the business to be successful beyond his retirement. And this is his year to retire! He is so excited and the right leadership team is fully in place.
There is more to succession planning than who takes over the family business. It is also about how to help family members appreciate the value of what’s been built and what their roles are in its continuation.
Some Key Success Factors
Here we will look at some key success factors to ensure a family business runs smoothly from one generation to the next:
- A formalized plan for transitioning from one generation of leaders to the next: The transition can be done smoothly if each generation has had time to learn about the business, cultivate their skills, and prepare for an eventual transition. A well-thought-out plan will smooth out a lot of potential problems and will make the transition much easier for all involved. There are many different ways to approach this issue from transferring shares or entering into partnerships to grooming potential successors until they are ready to take over completely.
- Identify successors: Succession planning begins with an examination of prospects’ current skill set. Are the members of each generation currently working towards roles within the business? If not, what skills need to be developed? What activities could be implemented to help develop these skills? Should individuals from outside the company be brought into leadership roles? If so, how can they best support and contribute to the business? Does the business have a development program that will allow potential successors to grow into their roles? To proceed effectively, it may be helpful to conduct an anonymous survey of employees and other key stakeholders to determine their perceptions of each potential successor’s strengths and weaknesses as a future leader so that everyone can have some objectivity about the strengths and weaknesses of each candidate.
- Assess whether any inter-family issues need to be resolved prior to naming successors: Family dynamics must be considered and strategic decisions must be made regarding how to manage these relationships to maximize success in both the short-term and long-term management of the business. The process of implementing a succession plan requires that each family member have an understanding of his or her role in the business, where it fits into the overall plan, and how it contributes to achieving success for all parties involved.
- A clearly defined chain of command with all parties understanding their role: The line of succession must be clearly stated so that when the current owner(s) cease to own or manage the business, everyone knows who is going to step up and lead. Although this seems obvious, it is surprising how many disputes arise in family businesses because roles and responsibilities aren’t clearly defined. When succession has not been clearly defined, this can cause problems for everyone involved. Establishing the ground rules at an early stage avoids this problem.
- The Timeframe: The timeline of the process is very important to a family business because it can set the pace for everything else. Before setting up the succession planning process, it is very important to understand how much time will be required to complete each phase. While there is a general timeline that can be used as a rough guideline, it must still be tailored to each family and business in order to have any real meaning. In some situations, this process may take several years to complete, and in others it may take less than one year. It all depends on the individual situation of the business and the family involved. The timeline for succession planning may include such phases as:
- Business planning
- Evaluation of successors
- Training, mentorship, and coaching of successors
- Execution of plan
Problems in Succession Planning
The challenge of preparing a family business for the next generation is more daunting than that of non-family businesses because of the unique dynamics of family-owned firms. Following are some factors that make succession planning more difficult in a family business:
- Differences in expectation: The problem lies in the fact that business owners want their successors to be like them. The owners believe that only they can run the business well and so they start looking for people who are similar to them. However, successors may be more interested in running a business differently than their predecessors did. Successors may have different ideas on how the business should operate and may want to implement those ideas immediately. The major hurdle in succession planning is the difference between an owner’s expectations and a successor’s desires which leads to misunderstanding between the two parties. A common mistake made by many business owners is to assume that their successors will continue with the same philosophy and management style that they used when they were running the company. One way to combat this is to set clear expectations and take into account the differences among successors.
- The owner is unwilling to make his successors aware of his intentions regarding his business, his successor and other key members of management. Keeping them uninformed about their role in this regard reduces their motivation, commitment, and involvement towards preparing themselves for future responsibility in the business. In many ways, family businesses operate like a “web” in which each member has a specific role to play. This web must be structured so that each individual is supported by all others in his or her role. When one part weakens or fails, it can affect the entire system, which is why it is important for organizations with strong family ties to carefully prepare their next generation for leadership roles.
- By tradition, many family businesses are very resistant to change and may have a culture that values stability over risk-taking and innovation. As a result, owners may not be willing or able to relinquish control. They just keep running things as they always have, ignoring the fact that as time passes, conditions have changed and what worked before is no longer working today. However, the real test of any business leader is not how well they succeed in protecting today’s status quo but how much courage they have to bring about needed changes in order to ensure tomorrow’s success. A corporate culture that discourages or is hostile to change is a major hindrance to succession planning. Employees in such companies tend to be dependent on their superiors for many decisions, which can lead to poor performance when change occurs.
A good resource is Start Here: A Guide for Family Business Succession by Sara Stern. It’s a great workbook for your planning! It takes you through six questions that help you prepare for succession:
- What are your values?
- What is your legacy?
- What will things look like in ten years?
- What is your ownership philosophy?
- What is your plan?
- What do you need to solve to accomplish your plans?
The most successful family businesses look far into the future, set themselves up with a strong group of qualified successors, have a clear plan for making it happen as seamlessly as possible, and then put their plans into action. Taking a proactive approach to succession planning today can have many benefits. A sense of security comes from knowing that the business is in good hands—a feeling that helps keep stakeholders invested and motivated for long-lasting success.