Owner or steward?
Succession planning for private companies and family-owned businesses can be compared to a relay race, a track-and-field sport where team members pass on the baton to another team member. Passing the baton is a delicate moment, contributing significantly to winning the race. Passing the leadership “torch” to a new generation, whether family members or external new owners, also requires a certain amount of delicacy. The task is not an easy assignment. Even with good preparation there is no guarantee of a successful succession.
Research demonstrates that 70 percent of family businesses last only one generation, with 30 percent making it through the second generation and 12 percent through the third. Only 3 percent of family businesses survive to the fourth generation and beyond. These are not very “friendly” stats.
Many of my consulting mandates completed over the last twenty-five years were helping clients with their succession plans. I have assembled a short list of seven key points to watch for. This short list should help you avoid the pitfalls of succession and improve the odds of success.
Planning ahead is the first point on my list. I am not talking about a complete plan from A to Z, but at least a plan that allow for an orderly transition rather than one that is improvised in a panic mode. This is particularly important for the position of president. A surprised health issue or accident can happen any time and have serious negative influence on the business. Being ready with a qualified and ready successor, even for a transitionary period of 30, 60 or 90 days, can achieve stability until a successor is appointed.
Selection of a successor: A successor can be appointed from the internal organisation or recruited from the outside. An internal candidate has the advantage of knowing the company culture, the team, the business, and they already have a track record. Compare the situation to an external candidate, who must learn a lot in a relatively short period of time. Whether the choice is for an internal or external candidate, the key is to avoid trying to duplicate or copy the outgoing president. The search should focus on what is needed going forward, not just what worked in the past. Maybe the company needs new blood; or maybe continuity is key.
Family members: If the succession is planned for family members, succession for family members is usually accompanied with emotional aspects that need to be researched, evaluated, and managed effectively. Three key questions need to be addressed:
- Does someone from the younger generation want the job?
- Is the younger generation qualified and ready for the job?
- Does the young generation show potential but is not ready? A development plan is needed here.
Using external independent and experienced advisors is recommended.
Time factor: Succession planning is not a one-time event but a process. Preparation and readiness do not happen overnight like an ON-OFF switch but take time to materialize. To use an analogy, botched successions are usually the result of a “microwave oven process” rather than a well-prepared recipe.
Entrepreneur vision and legacy: Most family-owned businesses and private companies usually start modestly and grow over time. Some entrepreneurs have a long-term vision and want to leave a legacy behind, while others are focused strictly on business success. Entrepreneurs with a vision aim for passing the baton to a younger generation, while others are focused on selling the business to the highest bidder. A successful succession must identify the main goal(s) early in the succession process.
Legal and fiscal considerations: While succession planning will always include legal and fiscal considerations, these are secondary to the key objective of finding the “right leader” who will protect the business performance and take the organisation to the next level of success.
Unique situation: While my short list should help avoid the key traps and pitfalls of succession, my experience has taught me that every assignment is different and successful successions require the use of experience and fundamental respect for people emotions. One size does not fit all.
Many large family-owned companies have managed to stay privately owned through successful succession planning. CARGILL, PUBLIX, MARS, and S C Johnson are few examples of companies that do not offer publicly held stock. Their “private status” has enabled them to avoid the outrageous emphasis on the next quarter’s earnings report and focusing instead on doing what is right for the next generation.
My favourite key question with succession is to ask “ do you consider yourself an owner or a steward? “ ... a very simple but difficult question that will set the stage for a successful succession.
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