Successful Succession Planning For Family-Owned Companies

Succession planning is one of the most difficult endeavors a company owner will ever undertake; therefore, it’s often procrastinated and avoided. The critical question is how to approach, work through, and resolve family and organizational issues. This must be done positively and constructively to protect the future of the family and the business. The process of facing one’s mortality, retirement and restructuring of organizational roles is never easy. As Woody Allen once remarked, “It’s not that I’m afraid to die, I just don’t want to be there when it happens.”

Less than 33 percent of all family businesses continue from the first generation to the second and only 13 percent make it from the second to the third, according to Family Meetings: How to Build a Stronger Family and a Stronger Business, by Craig E. Aronoff and John L. Ward. Although sometimes this is for sound business reasons, more often it is due to poor communication, as well as poor problem solving and decision-making processes; on top of that there are family conflicts, avoidance of succession planning, and sibling rivalry. It is not just that succession planning is difficult and often avoided; it often is affected by historical fears, guilt, hurt and resentment. The seeds of destruction often have been present for years and then emerge in the succession process. The problems inherent in succession planning often lead to the breakdown of the family as well as the business. This is true both in small and large family businesses.

Consider the following dilemma:

For the past 45 years, Harold put every dime into his business, working at least six days a week while his wife raised their five children. His distribution business, although small in number of employees, has provided a fine living for him, his family and seven employees. His two sons, Al and Steve, have both worked in the business for more than 20 years. Now 75 years old, Harold's health is deteriorating. Although he hates to admit it, he knows he must step down from running the day-to-day operations.

Harold is struggling with who he should name as his successor. Al, his older son is a very hard worker, but tends to be overly aggressive, and he easily alienates some of the sales reps and employees. Steve has better interpersonal skills, but his work ethic and business acumen are not as strong. In short, they each have deficiencies. If they were able to work together, Harold believes they could continue to run a successful business.

However, the next morning Steve proclaims, “Dad, it is absolutely impossible for me to work with my brother. No matter what I do, I’m criticized. Al insists on making all the decisions, and doesn’t even listen to my input. Even though I’ve generated a great deal of business and improved our reputation, I’m treated like a dog here. Either he leaves or I do. I’m at the end of my rope. If you want to give him the business, just give me cash.

Succession in family-owned and managed businesses is laden with challenges, both business-related and emotional in nature. That’s another reason business owners often take pains to avoid it altogether.

Why is succession planning avoided? When asked why, owners typically reply “We don’t have enough time,” or “Planning limits flexibility,” or “There are too many uncertainties to make planning worthwhile.” Of course, all of these responses skirt the issue entirely.

Most small family business owners do not face these issues until their retirement is fairly imminent, according to The Family Business, P.C. Rosenblatt, et al. By this time, they are in their 60s or 70s and the children may have worked in the business anywhere from 5 to 35 years. Further complicating matters is when one sibling has worked in the business for a number of years more than his/her siblings, and/or when there is a large variance of skill level and/or clear levels of incompetence. The pressures on the founders and other family members are extraordinary in these cases. Most distributors are ill-prepared for the enormity of the task. Like the development of parenting skills, challenges tend to be addressed only when they arise.

The Possibilities
In planning the future of the business, there are only a few options available:

1. Sell the business.
   
2. Make one sibling the president with the others reporting to him or her.
   
3. Carve out different territories or businesses for each sibling.
   
4. Create a family business team of two or more siblings who jointly operate the business.
   
5. Hire professional managers to run the business but maintain family ownership and control.
   

Some necessities for success are the ability to communicate and solve problems as a family business team, which requires trust between the siblings and in the leadership of one’s family and business. As any parent knows, this is not an easy task, but it is possible and done much more frequently than is usually assumed.

The key to shared ownership is the development of trust, a shared vision and agreement as to governance issues, usually called a family protocol.

The Challenge of Succession Planning
As the family business owner, children, and business all age and mature, new challenges arise. Most importantly, owners want to figure out how best to sustain the wealth of the shareholders. Can the next generation run the company successfully, and can they continue achieving a positive growth rate? Are the children competent and interested in the firm? How is the industry changing and how ready is the company for the market and economic changes? Are family members involved in the business able to work together effectively as a team? How well do they resolve conflicts?

Mixed in with every family business is the history of the family relationships in general. Do the children feel they are fairly treated? Is there reasonable family harmony and unity? Do business tensions and conflicts spill over into the family well-being? Do family members have a respect for each other and the ability to enjoy family gatherings?

Owners need to consider: Will there be a sense of family after the parents pass away? Does the next generation want to maintain family cohesiveness? Is the business looked upon as the primary source of income for the next generation or is it seen as an auxiliary source of income? Does the family hope to maintain managerial leadership or bring in professional managers? Is there a board of directors? If there is no board, then would one be useful? Also how will children who do not work in the business be compensated? Are family members open to discussing these topics?

How to Approach Succession Issues
The following questions (see sidebar) can help pave the way for the family to address and solve this sticky problem. They are best addressed by the family meeting together to discuss these questions in what often becomes a forerunner to what is called a Family Business Council. What’s important is for the family to be able to talk and explore these questions in-depth together. Through this discussion, solutions can most often be found that are best for the individuals, the family and the ownership of the business.

As is obvious, these kinds of discussions are delicate and must be handled with great tact and sensitivity. In fact, many families use a professional family business consultant to assist communication on these sensitive topics. The discussion is usually best handled in a way that takes into account all of the influential factors. This means looking at the issues on an individual level, family level and business level. The discussion, which can last several days, is best done by addressing the following:

• Mission of the Business — What has been the mission of the business? What is its purpose? Why has it existed and why should it continue to exist? For example, if profit is the primary reason, perhaps the funds from a sale could be invested more profitably.
  
  
• Mission of the Family — What do we cherish about our family today and what kind of family do we wish to have in the future?
  
  
• Core Values of the Business and the Family — What are the core values that have given both the business and the family its sense of identity?
  
  
• Vision of the Business — Determine what kind of business is wanted in the future. Look at market share, desired growth rate, and how far apart you are on these critical issues.
  
  
• Governance Structure — How will family business issues be decided? Typically as the business moves from one generation to the next, the best form of governance also shifts. The company may need to develop a Board of Directors, Family Council and a Family Protocol.
  

A Family Council is a body of family members that is often formed to help clarify and resolve any family issues that conflict with family goals or business issues that cannot be handled directly in the business, such as compensation for family managers.

A Family Protocol is a document; it is somewhat similar, but much larger than a buy-and-sell agreement as it encompasses the mission, vision, values and all key policies about governance of the family business. It is like a constitution that includes policies about such topics as whether all family members will work in the business, how family members will be evaluated and compensated, business conflicts of interest, rules of entry and exit for family members who work in the business, etc. It is strongly recommended that the family have a signed Family Protocol before the succession takes place.

Annual Evaluation of Family Governance — all family business decisions and ability to operate are reviewed on a regular basis.

Accounting For Family Values
The values and norms at work in the family will affect the family business. When individuals fear that problems will not be handled fairly or compassionately — that their feelings will not be valued and their input will not affect decision-making — they become defensive and distant. Most individuals leap to blame either themselves or others if they are unable to work and communicate as a team. As the breakdown of a family business is often a breakdown of family relationships, the effects are felt with much deeper intensity by each family member, regardless of the size of the business.

The challenge of succession planning and family-business leadership is to constructively build healthy family and business relationships. In many ways, the kind of leadership that tends to be most effective is one that focuses on the development of individual character — as all parents strive to do — and the development of a successful enterprise. Few business leaders would define success in their business only in terms of economics. Health for family businesses may be best defined as the development of moral character, ability to work as a team and financial success. To meet this goal is the challenge of family business leadership. The quicker it is addressed, the better.