Keep
Your Business Going
With A Succession Plan
Nearly 70 percent of family
businesses are either liquidated or sold after their founders retire. Even
worse, only 10 percent of family businesses make it through the third
generation. The primary culprit: failure on the part of the owner to plan
adequately for succession. The worst thing you can do is to procrastinate in
planning for the succession of your business. Whether you are planning to retire
and pass on your business five or 10 years from now, you cannot afford to waste
any more time. Here are some things to consider in order to ensure that you and
your business continue to prosper.
Facing Up To Succession
There are several reasons why
leaders of family businesses put off planning for succession. First, their
identity may be so tied to the business that they either put retirement off
indefinitely or go into semi-retirement, creating an uncertain, unhealthy
environment within the business. Second, naming a successor from within the
family can cause great conflict. As a parent, a founder wants to treat the
children equally, which means dividing the wealth equally. But, the
businessperson knows that the business should go to the most capable, qualified
candidate. Often the easiest solution is to ignore the conflict, never planning
for the future, which can have disastrous consequences.
In general, family-run
businesses need strategic and succession planning even more than public
businesses do, for several reasons. First, CEOs of family businesses typically
serve six times longer than their counterparts in public companies. The length
of tenure makes the impact of change, when it comes, enormous. Second, family
businesses have unique capital needs that require planning. For example, such
businesses often must pay estate taxes when the founder dies. They must be
prepared to buy out uninterested heirs. And the families can make unpredictable
financial demands.
Therefore, planning for who
will take over once the founder is gone is one of the most crucial decisions for
the life of a business. Yet, according to surveys conducted among businesses,
only 51 percent of the owners had a strategic business plan and, of that 51
percent, only 12 percent had written plans. In the absence of well-articulated
plans, family-owned companies are especially vulnerable.
Selecting A Successor
Selecting a successor is often
a decision by default. Most family businesses will have one member of the next
generation who is more active, qualified, and interested in the business than
his or her siblings. Frequently, the founder has already spent a great deal of
time grooming the successor-apparent or the successor has soaked up much of the
necessary knowledge on his or her own over the years. The challenge, more
typically, is in finding ways to assure equitable treatment for the
non-participating family members, be they spouse or siblings.
If succession has not already
been determined by interest, proximity, or birth order, a group effort in
choosing and grooming an individual is one way to proceed. Key employees who are
not family members can often be recruited for a transition team. If your valued,
long-time key employee can participate in the selection and initiation of a
successor, the entire team will benefit over the long run. Involving key
employees is a good way to retain them, and retaining them is essential for
continuity and credibility in dealing with outside sources such as banks and
suppliers.
If there is competition
between your children for the position, a decision to divide the power between
them is not likely to be successful. Ownership may be divided but management
should be clearly delineated. Often ownership can be split into passive and
active shares, giving the active successor the necessary control over the
business but providing an equal economic benefit to the inactive shareholders.
In some cases, the business can be divided along functional lines, so that
different family members can assume control over well-defined functions or
business units.
Putting The Right Spin On Retirement
The more active your role in
planning for the transfer of control to your successor, the more your business
can benefit from your knowledge. Make an inventory of your job activities. This
will serve as a guideline to your successor by highlighting the areas that are
most important and by identifying tasks that might be eliminated. Conduct a
future job analysis. Identify the challenges ahead and the requirements for
meeting them. Create objectives to be accomplished before you retire.
Once
you’ve decided to retire, there’s some risk that you’ll lose interest in
the job. Setting goals can help you stay interested and focused. Create an
inventory of content knowledge. Plan to transmit knowledge about your position
that will be critical to your successor, such as industry knowledge or
historical knowledge about the company. It’s also important to create an
inventory of process knowledge. You do many things instinctively. Now is the
time to become more conscious of the processes you use, so you can pass them on
to your successor.
Finally, Make It Official
Too
many family businesses pass the torch in private. It’s beneficial to have a
formal celebration or ceremony so employees and bankers are not confused about
who’s in charge.