When the kids take over...

For family-run businesses, nepotism can be a good thing, but it requires careful thought and foresight

Succession planning is a tricky matter for any organization. When it comes to choosing a successor for a family-run business, it’s an entirely different — and far more complicated — matter.

The ultimate responsibility for succession planning in a public company is the board of directors. This is particularly true for succession to the role of CEO. Based on a number of well-publicized failures, the process is not working very well. If this is the case for public companies, what are the odds for successful succession planning in the family business? Based on the history of a number of family businesses, one could easily come to the conclusion the odds are not particularly good.

Why does it fail?

No planning. One of the prime reasons for failure is that there is no succession planning other than the owner’s desire to have one of his progeny take over the business. In many cases, the matter is not discussed, and as a result a lot of assumptions are made. The issue becomes more complex if there is more than one family member in the business.

Aside from the confusion created because of an implied understanding of who will climb to the summit, family members may not be provided with the development needed for the top position. The result is that when the son or daughter takes over, they have a limited understanding of the business as a whole.

Too many competitors. There are a number of situations where the eldest child has assumed the role of CEO for no other reason than being the firstborn. This may or may not have been the best person in the company to take on this responsibility. Other siblings may be more talented, better trained and possess more suitable competencies.

If a selection is not made prior to the passing of the owner, a very dysfunctional situation can arise as various family members contend for the role of CEO. This situation becomes further complicated if the company is not a sole proprietorship and two or more partners own the firm, and each has children.

In-laws can be another source of complication. Siblings may be able to recognize, albeit reluctantly, that a brother or sister is better suited to head up the organization. But a spouse may not be as willing to accept this reality, leading to an ugly situation.

Another area of complication is that of the long-time executive who has worked with the proprietor for many years in a key role. She may or may not have partial ownership in the firm, and may be under the impression she was going to assume the mantle of power when the owner left. It may even have been the owner’s preference that she does, but the family may have other ideas.

Golden Rule — The one with the gold rules. Even if the owner had a non-family member in mind to take over the company on his death, family members can easily thwart that plan if the person is not in place prior to the death.

The loss of a long-time senior executive as a result of such action can lead to corporate suicide if the family member who takes control does not have instant credibility. That credibility has to be with all the firm’s stakeholders.

Simple Simon meets his Waterloo. There are cases where the child chosen to be the successor is not capable to do the job. He is left the position by his parent because the parent could not bring himself to the heart-wrenching realization that his son does not have the necessary attributes to succeed him as CEO.

The offspring may also not have the intelligence or humility to surround himself with competent people that could successfully run the business.

The simple case

The above problems have been primarily identified with the owner-operated business. In such cases, if the business fails, the loss is often limited to the employees, the creditors and the family. However, some family businesses grow to mighty proportions and during growth go to the public financial markets to get additional capital. Often, the original founder maintains control of the organization through the maintenance of special voting shares. In such cases there are many more stakeholders in the form of investors.

What actions should be taken?

Have a plan. One of the first things an owner should do after a business has survived its birth is to give consideration to how he plans to leave. It could be argued that such a plan is irrelevant when a business is in its childhood stage, but an exit plan should form a key element of the strategic plan, whether the plan is to go public or leave the business to one’s children.

Regardless, a plan needs to be developed to address the matter of succession. As the company matures, the original succession plan might need to be amended, but it’s important that a plan is always in place.

Conduct an objective appraisal. Most parents have a difficult time being objective when it comes to appraising the capabilities of their children. Even when it comes to deciding who will take over the business the parent has sweated over for the last 20 or more years, the ability to be objective is strained.

Family businesses that have had a public stock offering frequently have a board of directors, comprised in part of non-family members. Although these external directors may be family friends or acquaintances, they can usually provide a more objective view. They have the benefit of understanding sensitive family issues, as well as the benefit of observing the performance of family members. They should be used to provide input for the succession plan.

Smaller family companies often do not have the luxury of independent directors. But there is still the need for an objective appraisal of family members who are potential successors. In such cases, a panel of external professionals with a long-term relationship with the firm and the family could be used. The panel could consist of a senior human resource consultant, the firm’s banker and the firm’s auditor. A customer or client can also provide valuable input. The basic goal is to get an objective assessment of the available talent.

More than a silver spoon. To be successful, it takes more than being born with a silver spoon in one’s mouth. As business continues to become more complex, training and development become greater necessities.

Part of any succession plan should be the creation of a training and development plan for the child anointed to take over the business. Although the parent may not have had extensive schooling or training prior to starting the business, that is not a reason to deny the planned successor such preparation. The business will be a different entity when it is passed on. As Ichak Adizes pointed out in his book Corporate Lifecycles, a different set of skills and competencies will be needed from what was required to start the business.

The development plan consists of more than just university or college and other training courses inside and outside the industry. Learning experiences within the working environment are just as key as a formal education.

Can they cut the mustard? The ideal situation in the development of a successor is to give her the opportunity to be responsible and accountable for a business unit. Putting a possible successor in charge of one of the companies under the family umbrella can be a litmus test. If the daughter succeeds, she would have instant credibility within the larger organization because she had already proven herself.

All family businesses do not have a number of companies or a number of plants. But most have some identifiable component, the performance of which can be segmented, whether it is a key customer, a manufacturing department or some other important element of the business.

Independence. In some industries there are close friendships between business owners. In some cases, an owner is prepared to provide a training ground for the son of another owner from a different city or country. The advantage to such arrangements is that he has the opportunity to work independently. If the child has a decent level of intelligence, he will recognize the importance of doing well in this environment.

If time allows, it is often beneficial for a planned successor to work in an unrelated business. This provides him with a broader approach to business when it comes time to assume the reins of power in the family business. He also has greater confidence in his own ability because he has achieved in an unprotected environment.

High blood pressure — sell out

If the owner of a family business is not prepared to develop a comprehensive succession plan for the business, then the first time the doctor tells him he has high blood pressure or a similar ailment, he should plan to sell out.

Selling out is a form of succession strategy. In such a strategy the purchaser is the one who has to assume the problem of staffing the business with qualified management in the future. It avoids family problems and if the owner is lucky, the purchaser may assume the task of making a competent executive out of that favourite son or daughter.

Fred Pamenter is managing partner with Pamenter, Pamenter, Brezer and Deganis Limited, a Toronto-based HR consulting and executive search firm. He may be contacted at (416) 620-5980 or [email protected]

Latest stories