For over twenty years, George had promised his two sons they would take over the family business. But when the time arrived for the patriarch to hand over the reins to Henry and Steven, he just couldn’t bring himself to let go. Itching to assume leadership, the sons were seriously considering jumping ship and starting their own company. But they were reluctant to do so because their departure would leave the beloved family enterprise foundering.
What to Do?
“In situations like this, it’s often useful to break the solution down into stages,” said Sam Brownell, CEO of Stratus Business Advisors (stratusbusinessadvisors.com). “The first stage is to have private conversations with each of the parties involved. What are their goals? What do they expect their roles to be after the transition?”
The answers to those questions will help determine where everybody’s coming from and what motivates them, said Brownell. The second stage is to use these insights to determine how the business can be structured to meet everyone’s needs.
Plan Ahead to Avoid a Rudderless Situation
How did that approach work in the case of Henry and Steven? We’ll reveal the answer later in this article. First, let’s cover the lessons learned from the story. It all begins with making succession planning a priority and moving it off the back burner.
“The biggest mistake family businesses make is not proactively bringing the next generation into conversations about who will take over the reins of leadership before they really have to,” commented Tim Vorhoff, senior vice president of CreoValo, a merger and acquisition advisory (creovalo.com). “That’s an easy trap to fall into when you get caught up in the daily tasks of running a business.”
The result is a company with operations entirely dependent on one person. “Too many family businesses fall into the habit of operating completely through the owner,” explained Joe Anto, managing director at PCE Investment Bankers (pcecompanies.com). “That individual maintains all the relationships with customers and vendors.” When an unexpected event throws a monkey wrench into operations, the result can threaten business survival.
“The most common unexpected disasters in business are what I call the five Ds: death, divorce, disability, disagreement and displacement,” said Vorhoff. “The last refers to such things as sudden shifts in the market, or the loss of a long-term lease.”
When there’s no obvious person to take charge at the onset of such an event, the result can be deteriorating customer support, lower employee morale and a resulting nosedive in financial performance. In the worst-case scenario, the family will be forced to sell the business — often at a fire-sale price if the heirs need to raise cash for inheritance taxes. Buyers, too, will be reluctant to purchase a rudderless operation with no visible leadership in place.
Start Early and Be Intentional
Adequate preparation takes time. “Family businesses often think of a transition as the passing of a baton in a race,” said Devin DeCiantis, managing partner at Lansberg Gersick Advisors (lga.global). “In their imagination, one person is slowing down, and another is speeding up. At a singular moment in time there is a tradeoff, and the business is off to the races with a new leader.”
The reality is that succession is a marathon, not a sprint. And it’s a journey that is best started well in advance of the actual moment of power transfer. “Future leaders need time to incubate,” suggested DeCiantis. “They need to absorb not just the expertise relevant to the particular enterprise, but also the leadership skills and social capital necessary to be effective in the role.”
For their part, the retiring generation wants to know their baby will be well managed, noted Amy Wirtz, senior consultant at the Family Business Consulting Group (thefbcg.com). “Trust needs to be built in the incoming leadership team. The idea is to gradually scale up the next leaders, so they are seen as able to meet the needs of the business when a transfer is required.”
Expertise is required, but so is accountability. Wirtz suggests avoiding misunderstandings down the road by establishing ground rules for family participation, including pay and performance expectations. “Will you bring in a family member only when a position is available, or will a job be created for them? Will you treat them differently from other job applicants by making it easier or harder for them to be employed? How will they be paid? How will they be fired if they don’t perform to standards?”
Address Differing Interests and Put Heirs in the Right Seats
The second most common error is putting kids in the wrong roles, said Vorhoff. “You need to figure out where each individual thrives. What type of work do they do exceptionally well? How can you put them in roles where they’re happy with what they’re doing, as opposed to those that you need filled?”
Absent honest conversations, unrealistic expectations can create tensions that threaten to scuttle the family business survival plan. “We tend to make up stories about what we think someone else is thinking,” warned Kevin D. Quinn, president of Legacy Counsellors (legacycounsellors.com). “Mom and Dad might be saying, ‘Our oldest son’s going to be devastated if we tell him we really think his younger sister is more suited for the role of president.’ On the contrary, their son might welcome being relieved of the responsibility of running the company because he finds the required work overwhelming or uninspiring.”
When multiple siblings are involved, the more successful transitions are characterized by equitable rather than equal dynamics. “Fair treatment takes into account each person’s track record with the business,” said John Frank, CEO of Third Road Management, a fractional financial services firm (thirdroadmgmt.com). “Maybe one sibling has sweated it out for the company every single day for the last 20 years, while another has never worked a day in their life. Succession decisions should recognize these disparate histories.”
The business should ensure that the sibling chosen for the CEO role has ample opportunity to learn the parts of the business they have not yet been involved in. Maybe they already have a fairly senior role in sales, for example, but they need to get a good handle in operations and fulfillment.
Share the Burden, Teamwork Makes Family Businesses Thrive
Suppose two or more siblings seem equally qualified for the CEO role. Can they share the top job?
“Co-presidencies happen more often than I ever thought possible when I entered this field,” said Wirtz. “Sometimes it works, and sometimes it’s a complete disaster.”
Success and failure, added Wirtz, often hinges on careful preparation. “A co-presidency can succeed when there are very defined roles and responsibilities for each party, and understandable definitions of success.” The siblings must also be willing to work together and have a history of doing so. In contrast, if there’s already a kind of long-standing rivalry among the siblings, sharing the reins of power can lead to conflict and costly misunderstandings.
A cooperative management dynamic may come about even without a formal designation of a co-presidency, noted Wirtz. “Maybe Andrew stays heavily involved in sales while Elizabeth ends up as his right-hand person, handling the requisite data analysis.”
Whatever the nature of the final decision about who will fill the top role, an active and carefully selected team of advisers can be an invaluable assist. “At the time of transition, the company’s retiring executives might move into positions on the board of directors,” suggested Vorhoff. “That allows them to collaborate and provide critical insights while the primary responsibility for running the company shifts to the next generation.”
Pinch Hitters Lead Until Successors Are Ready
Suppose two siblings are eager to take over the top job, but neither seems completely prepared for the role. In such cases, a non-family executive, called an interim manager, may take the company reins until the next generation is ready. “A temporary CEO might carry the company for a number of years while helping the next generation evolve,” said Frank.
An interim manager is to be distinguished from a fractional manager. While the former fills the gap between the departure of an executive and the arrival of another, the latter works on a part-time basis for an extended period of time, commonly at from one to five different businesses.
A fractional manager might be just the thing for a family business not yet large enough to hire a full-time executive for one of the top slots, or if the next generation requires additional training.
Henry and Steven
Now let’s return to our opening story. Brothers Henry and Steven were thinking of leaving the family business because father George was reluctant to move on. What was the solution?
By having a private conversation with George, Brownell found that the patriarch was afraid of losing control over an operation he had spent a lifetime building. On the other hand, conversations with the brothers uncovered a different mindset: They were largely concerned about finances, wanting some payback for the years they had spent with the company and some recognition of their accumulated expertise.
The solution was to create a new ownership structure. “We moved Dad from 100% stock ownership to 10%, assigning him Class A shares having 90 votes each,” said Brownell. “The sons received 90% stock ownership with Class B shares having one vote each.” Dad retained much of his control since he could outvote the sons on major initiatives. The sons received the financial benefits of healthy dividend distributions, while enjoying the career development advantages of being the face of the business to customers, banks and investors.
“When George was finally convinced after three or four years that his sons could run the business, he was willing to gift the last 10% of stock to the kids,” said Brownell. “Then he took a paid position on the board so he could provide strategic oversight and budgeting.” The sons appreciated their father’s knowledge about the industry and his trusted relationships with customers, and the father appreciated a continuing opportunity for intellectual stimulation and company involvement.
An early start on a transition plan will obviate a crisis situation that threatens business survival, while allowing enough breathing space to grapple with unanticipated crimps in the family dynamic. In the final analysis, transition planning is more an art than a science. And the best stories start early with honest conversations. Is your family business ready for the transition? Take our quiz on page 44 to find out.
