Family Business Succession
The Final Test of Greatness
By Craig E. Aronoff, Stephen L. McClure, John L. Ward
Palgrave Macmillan Copyright © 2011 Family Business Consulting Group
All rights reserved.
The Final Test of Greatness
Few challenges demand more of a business owner than passing on the family business to the next generation. Family members' lifelong hopes, dreams, ambitions, relationships, even personal struggles with mortality—all figure into managing succession.
Yet managing succession is the task that is most critical to securing the future of private enterprise in the United States. Rising competition, government regulation, taxes, and other problems notwithstanding, the failure to plan and manage succession well is the greatest threat to the survival of family business.
Hundreds of thousands of businesses across the nation are approaching the retirement or death of their founders or chief executives with no plans for succession or inadequate plans that will fail to produce the desired results. For those family firms with plans, many will fail because they mismanaged the succession planning process. No wonder less than one-third of family businesses survive into the second generation, and only about 13 percent make it into the third.
Business owners know the stakes are high. Ask any group of family businesspeople at seminars around the country to name their Number One concern and the answer almost certainly will be "succession." Consider some of the issues they raise:
"I don't think Dad is ever going to retire. What kind of a future does this leave for me?"
— The son of a family business owner
"It's impossible for me to just let go of the company I've spent a lifetime building. And besides that, the next generation is not ready."
— A family business founder
"I don't think I'm ever going to own any stock in the family business. Why should I continue to participate in it?"
— The daughter of a family business CEO
"We have a succession plan; it was decided by my dad and his brother years ago. My brother and sister and our cousins don't like it, but we don't make the rules."
— A third-generation member of a family firm
"I don't know how I'm ever going to get along with my brothers and sisters in the business."
— One of several children in a family business
As professional advisors often say, "Family businesses have only three problems: succession, succession, and succession."
THE FINAL TEST OF GREATNESS
Yet the process of succession offers rich opportunities for business-owning families. Not only is it a chance to make the most of family business assets, but it is also a way to perpetuate for new generations the special privileges and opportunities of ownership. It is also a chance to preserve a lasting institution that will reflect the family's ideals and goals long after the current leader is gone.
For most family business CEOs, planning for the continuity of the enterprise is the ultimate management challenge. The owner must safeguard the long-term health of the business, as well as prepare and install a successor. Other family members' roles in the business must be mapped out. If multiple siblings or cousins are involved, as they are in nearly half of all family businesses today, the headaches multiply in kind.
Plans must be laid to hold down estate taxes and ensure the CEO's postretirement security. And finally, when the CEO is also the founder, it means letting go of the business he or she spent a lifetime building—often an incredibly painful emotional experience.
Perhaps most difficult of all, a great succession is one that hardly anybody notices. It is a non-event, an evolutionary process arising from careful planning and the artful management of expectations over a period of years. By the time the baton is finally passed, the word throughout the family and the business should be, "Oh, that's what everybody expected."
To execute a smooth succession, a leader must perform heroically on many levels, both professional and personal. As management expert Peter Drucker once observed, "The final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let his successor run the company."
PLAN—AND MANAGE THE PLAN
This is the third edition of this book. It reflects many more years' worth of knowledge gained in the study of family business since the first edition was published in 1992. The first edition, for example, concentrated on the founder of a business. This edition identifies succession management problems and solutions for any family business CEO, whether the business is in its first or second or third generation, or beyond. Whether you're the founder of the business or the third-generation owner-manager or the CEO of a business in which only your branch of the family is active in management, the ideas put forth in this book should help you grapple with the issues of managing succession.
In addition to addressing the current CEO, we also open our arms wider to the successor generation with this edition. If you're a potential successor, you will find these pages useful in understanding what the senior generation is going through, how the succession process works, and how you can support it. You will also gain valuable insight into what goals must be met before the incumbent CEO can separate comfortably from the business.
Two other groups should find this book helpful: (1) other family members, and (2) key non-family employees. The transition of leadership from one generation to the next is often the source of uncertainty for individuals in either group. In the family, a spouse may be facing the retirement of the CEO and all the changes that brings. Other family members may worry about how the business will fare under new leadership. In the business, non-family executives may feel intense loyalty to the outgoing CEO and experience uneasiness or even resentment toward the successor. They may be concerned about their own job security once succession is complete. If you are a member of either group, this book should help ease your concerns and enable you to support and contribute to a well-managed succession process.
This revised edition of Family Business Succession: A Final Test of Greatness is significantly different in another way. In the previous edition, we concentrated on creating a succession plan. You will find in this new book that we focus not only on succession planning but more so on managing succession. Recent family business research and our own observations as family business consultants tell us that good succession management is like good strategic planning. CEOs find that the real value comes in managing the strategy of an organization, but they have to go through the strategic planning process first. Once they've done the planning, they understand that the real challenge and greatest value come from keeping it current and implementing it.
It's the same with succession planning: managing succession is the most important part, but you can't get there until you go through the succession planning process. Part of managing will mean recognizing when pieces of the original plan just don't work—a desired successor, after an attempt, might not want the job or may have to relinquish the role because of illness. There will be setbacks to almost any plan, but managing succession means preparing for them and, when you must, taking a different road to reach your destination.
Good strategic-plan follow-through requires tools for adjusting the plans and for realizing results. Follow-through on succession plans benefits greatly from tools for:
1. Business governance
A board of directors
2. Family education, communication, governance, and involvement Family meetings, family councils
3. Management/employment education, communication plan succession Well-integrated and strategic plan, and involvement
When these tools are in place and their priorities are in harmony, a family business has what it needs for succession management.
SUCCESSION: A DEFINITION
Narrowly speaking, succession means the transition of family business leadership and ownership from one generation to the next. Broadly speaking, however, succession is a lifelong process of planning and management that encompasses a wide range of steps aimed at ensuring the continuity of the business through the generations. It includes factors as diverse as exposing your children to the business at an early age, developing teamwork among sibling successors, preparing for your own financial security in retirement, and drawing up an estate plan. (See Exhibit 1.)
If preparing for succession is so complex, how can you break it into manageable pieces? Most business owners begin by laying the groundwork for transferring responsibility, control, and authority to the next generation. Suggestions on how to do that follow. You will also find information on choosing and grooming a successor, preparing the business and the family for succession, communicating the change to the family and the organization, and, perhaps most difficult of all, letting go gracefully.
We make an important assumption: that you and your family have already decided to keep the business in the family. We know this isn't a decision that can be taken lightly. It requires serious reflection and a strong commitment by the owner-manager and other family members.
We also assume that a successor candidate exists within the family, although succession should be given just as much careful attention in businesses where only non-family candidates are available. Most of the preparation steps are very similar to those for family successors.
THE REWARDS OF SUCCESSION PLANNING
It was hardly a typical father-son argument. The setting was a gathering of family-business owners. The father, founder of a convenience-store chain, was debating with his successor.
"I owe more to my son than my son owes to me," the father told a listener.
"No, I owe more to you," the son said.
"What did I create all this for? You're the one who is going to sustain it and grow this legacy," the father said.
"But you're the one who has given me the opportunity," the son replied.
Many business owners hope to accomplish more with their businesses than just the survival of themselves and their families. They desire a kind of immortality—to create or preserve something significant and strong enough to endure beyond their lifetime.
Many of these leaders find that the succession process opens doors to that goal. It enables them to pass on to subsequent generations some of the rewards of entrepreneurship—the opportunity to build, to manage capital, to make good things happen in the community and to have a sense of control over one's destiny.
A family business that thrives through successive generations affords the family a special forum to express individual creativity. Family members can learn the value of shared decision making and working toward common goals. Younger family members receive an education in commerce and enterprise stewardship they never could have obtained otherwise. Involvement of the family in succession builds family teamwork. All of this heightens the business owner's impact and magnifies the benefits of his or her years of hard work.
Good succession planning and succession management also enhance the value of the business by assuring that it retains the most talented potential successors. Too often, the best candidates flee the frustration of their succession prospects, seeking brighter opportunities elsewhere. Some families encourage this, maintaining the business so "the children who can't take care of themselves will have something to do." Over time, this practice destroys the integrity of the business.
The entrepreneurial energy of capable successors driving the enterprise built by their parents and grandparents can create a powerful business. A well-managed succession brings fresh perspectives to management that can revitalize strategy. Dennis Love was only 31 years old when his father, the founder and president of Printpack Inc., an Atlanta-based flexible packaging manufacturer, died suddenly of a heart attack in 1987. But Dennis was prepared. He had worked in the company on and off for 16 years and had earned degrees from Princeton and Harvard.
"There was a lot of support for Dennis within the company, he had a lot of experience, and it really made the most sense to have him take over," recalled Gay Love, his mother and chairperson of the board. He reorganized the company to encourage growth and pursued a strategy of acquisition, including taking the company global by acquiring two British firms. Since Dennis took charge, the company has grown from $175 million in sales to around $1 billion and from 1,000 employees to more than 4,000. Four of his five siblings now hold positions in the company.
THE SUCCESSION CONSPIRACY
Despite the rewards of planning and implementing succession, many family business owners find it easier to live with ambiguity. Who enjoys thinking about death or disability, making choices among children, and letting go of a powerful, prestigious, secure position for an uncertain future?
In what family business consultant and author Ivan Lansberg called "the succession conspiracy," everyone involved may conclude that it is in his or her best interest to avoid the issue altogether. Many business owners resist succession planning as prematurely focusing on one's death. As one second-generation owner of a Michigan-based manufacturer put it following a planning session, "I got killed off again today." Doing it means admitting that you won't live forever—a step they feel diminishes them. Spouses aren't usually eager to bring up the subject of retirement or death. Children don't want to be considered greedy or pushy and they also may have difficulty facing the prospect of their parents' passing. Key managers resist rocking the boat. Disrupting their own relationships with the founder in favor of a new, untested boss is unappealing. Friends and advisors hesitate to raise the subject for fear of offending the owner or hurting feelings.
Our culture offers few helpful models of succession. Most heroes are thought of as "dying with their boots on" rather than stepping aside gracefully. Successful succession processes are gradual—progressing quietly, with many realizing a transition has taken place only after it is complete. The lack of fanfare in quiet success contrasts dramatically with the hero worship in popular business media.
Dodging the issue protects business owners from making the tough decisions involved in a succession process. They tell themselves that by avoiding the issue, they are retaining key people in the business that might leave if a successor were named.
These leaders are kidding themselves. Avoiding the topic doesn't mean succession will never happen, and key people in the business know that. A lack of preparation for succession may actually drive them to another company where planning for the future is more solid. Like the many other people who depend on a healthy family business—family members, employees, suppliers, customers, and the community—key executives invariably respect the business owner's courage in preparing for a new generation of management. They hope for no less from a corporate leader. In this sense, planning and managing succession form the cornerstone of stewardship.
Nevertheless, some founders continue to avoid the issue in a kind of final, unconscious demand for the loyalty of all those who depend on the business: "How can you lack faith in me after all I have done for you? Just trust me." In the event of the untimely death or disability of the CEO, it becomes clear that he or she has unwittingly created a time bomb. The surviving owners or heirs may be disoriented and ill prepared for management. No plans have been laid. The whole family avoided all the sensitive issues of succession while Mom or Dad was alive.
Yet the silence has not prevented each family member from forming his or her own private expectations about dividends, compensation of management, family participation, and rights to ownership. If worse comes to worst, each soon hires a lawyer, the first step into a litigious quagmire that can destroy everything the parents built over a lifetime.
Leon Danco, a respected family business consultant, assesses the risk: "If you don't plan, you'll have the satisfaction of knowing that it's the lawyers four limousines back who will be settling your family's future."
Even in peaceful families, a poorly planned succession is costly. Key employees may leave if they lack confidence in the new CEO. Estate taxes will drain capital. If the business is sold, an absence of consistent, strong management will reduce the price, eroding the assets that have taken a lifetime to build.
To be sure, planning and managing succession can be daunting. But it is doable, and these pages will guide you through the endeavor.
The Pieces of the Succession Puzzle
While venture capitalists are not always the best friends of family business, they have a useful rule of thumb: as soon as you get involved in any deal, start working on an exit strategy.
Thinking early about exit strategies is sensible—not only in capital planning but for management and ownership succession as well. The first night you sleep peacefully as a business owner satisfied that you have a viable company, is the signal to begin thinking about the continuity of the enterprise. Second-generation family business leaders in their forties need to begin thinking about succession even while the founder is still coming in to work every day. The founder's retirement is too unpredictable to use as a trigger for beginning the next round of succession planning. (Continues...)
Excerpted from Family Business Succession by Craig E. Aronoff, Stephen L. McClure, John L. Ward. Copyright © 2011 Family Business Consulting Group. Excerpted by permission of Palgrave Macmillan.
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