Are you too stuck to effectively plan for succession

May 17, 2009
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In a recent conversation I had with a business owner, she revealed, “I know that I’m about 10 years away from transitioning ownership and that I should be planning that transition. I have some ideas about how I would like that to happen. But the challenges seem so overwhelming, I’m stuck. I don’t know where to start.”

Research indicates that she is not alone in her concerns. Here are some items for consideration.

First things first: Have an emergency plan. As Happy Fox, chairman of Henry A. Fox Sales Co. and a volunteer for Family Business Alliance’s Executive Partners Program, puts it, “Family business owners have a moral obligation to their employees to have an emergency plan in place so that those employees do not lose their jobs because of the sudden death or disability of the owner.” How will the business continue in the event of an unexpected tragedy? Who knows what (and where) the plan is? Who will manage the business day-to-day while your family tries to cope with the loss? Will estate tax issues be sufficiently handled, or will they sink the business?

While these may be difficult questions to face, the answers provide important protections, not only for employees but also for family members.

An emergency plan is not a succession plan. Having an emergency plan may alleviate immediate concerns about negative fallout from sudden, unforeseen events, but it is no substitute for thoughtful succession planning.

Dr. Joe Astrachan, internationally known family business educator and researcher, points out that studies of 18,000 family businesses demonstrate no correlation between having a written succession plan and successful succession. He cautions that having a static, rigid succession plan that cannot accommodate future unknowns is rarely helpful. 

Instead, these studies found a correlation between succession success, and 1) having a board of directors whose makeup includes some outsiders; 2) keeping a strategic point of view rather than focusing only internally and on the immediate, or writing a strategic plan that collects dust until the next crisis; and 3) holding regular family meetings, an indicator of sound family communications.

In his lectures, Dr. Astrachan often describes these three factors as key disciplines that produce healthy family businesses, very much like the disciplines of not smoking, exercising and eating a healthy diet produce healthy individuals. These, along with intentionally preparing our children for responsible ownership, increase the chance of succession success. 

So, where to start? Needless to say, this is not a unilateral exercise for the CEO to complete and disseminate. At FBA’s winter workshop, a panel discussion between current family business leaders and the next generation, Ben Thompson’s response to that question received a rousing response from the audience. Ben, who purchased Thompson’s Remodeling from his parents in 2008 after participating in a well-thought-out, multi-year transition process, answered the question this way: “It starts with a pad of paper and a pencil, and each of you writing down your goals (for the transition).”

Most experts agree with Thompson, and then caution that this important step has its complications. Each individual involved in the process can have multiple, and at times mutually exclusive, points of view. To help sort this out, researchers have identified three interrelated systems operating within family businesses: the Family system, the Management system, and the Ownership system — all residing within an environment that includes key customers, suppliers, etc. Each can support or stress the overall system. Imagine a box, representing the environment, surrounding three overlapping circles, one for each system. Place the key players, both family and non-family, within their appropriate circles. For example, a non-family CEO would be located in the Management circle. A family member who is a shareholder would be located in the intersection of the Family and Ownership circles. A CEO/founder would be located where the Family, Management and Ownership circles intersect. At the end of this exercise, it becomes
clear that each person could be juggling one, two or three points of view on any given issue.   

“Failing to plan is planning to fail,” as the saying goes. There are significant legal and financial consequences to changing ownership. Failing to plan for this key event, or short-changing the resources needed for proper planning, can be disastrous for both the business and the family. Obtaining sound advice from experienced paid professionals can mitigate the risk. 

Knowing beforehand what kind of paid professional to use for particular aspects of the plan, and which questions to ask, can increase the cost-effectiveness of seeking such advice. FBA’s Executive Partner volunteer advisers can help family business owners name and frame key succession issues so that conversations with paid professionals are clear, focused and fruitful. Executive Partner volunteers are active or retired family business owners who have achieved success in both the family and the business, are passionate about the success of the sector, and are willing to share their experience. They welcome both simple questions and complicated scenarios. The service is confidential, free to FBA members, and available to others on a limited basis. To reach a volunteer adviser, contact FBA.

Mary Novello is director of Family Business Alliance, a collaboration spearheaded by the Grand Rapids Area Chamber of Commerce and the Family Owned Business Institute of Seidman College of Business, Grand Valley State University, and supported by family-owned businesses and service providers. For more information about the FBA and its Executive Partners Program and Next Generation Peer Groups, visit www.FBAgr.org, or contact Novello at (616) 331-6827.

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