Succession Planning Law

Articles

RESOURCES

Succession Planning: It Pays to be Prepared

By William F. Kruse

Leonard Zweig, founder of Family Business Magazine, recounts a story of the owner of a New England based family manufacturing business, who gathered his management team one day - including his son and daughter - and announced, "My flight to Chicago went down this morning and I was killed in the crash. What will you do to keep the company going?" He then reclined himself on a nearby sofa, gave no directions and refused to communicate. He just listened. After an hour of rambling, inconclusive discussion, the owner proclaimed, "I'm now convinced that my advisor was right - this company does need a succession plan."

Although an unusual approach, this scenario demonstrates a problem faced by many family businesses. While larger publicly-traded companies have long-since accepted the crucial importance of having a succession plan in place, such wisdom has barely dented the ranks of family-owned businesses. Surveys reveal that only about 20-35% have any kind of plan in place. Is there any wonder that only 30% of family businesses continue into the second generation, and only 10% survive into the third?

Without question, the transition from one generation to the next carries a high emotional impact. It is tough for most owners - particularly founders - to let go of the enterprise that has become the source of their pride, self-esteem and livelihood. To some, it's equivalent to planning their own funeral. One must confront issues of aging, mortality, control and power, not to mention ownership, equity, management, strategic direction and the transfer of key relationships from one generation to the next. Resistance can come from the owner, the spouse, the children, other relatives, other key executives, customers, venders or friends. No wonder reactions can range from avoidance to denial, frustration, and depression.

Historically, succession typically was determined by birth order, and perhaps gender. Today it is much more complicated. In a recent survey, 50% of family business owners said they would prefer the next generation to own and manage the business jointly. Successors in these businesses quickly discover that they are interdependent, and that the management of their relationships is critical to company survival. The business can become the playing field on which all manner of family issues get worked out, and this can seriously impede morale, productivity and performance. Moreover, left unresolved, such matters can build up over time and become an entrenched part of the corporate culture.

Where to Begin

The first thing to recognize is that succession is not a natural consequence, nor even a decision, per se. It is an organized process that involves information gathering, discussion and debate, research and evaluation, visioning, strategic development and a host of other disciplines. It must involve all family members, and be undertaken with a firm commitment to achieving a "win-win" solution. By approaching the succession issue in this manner, the pitfalls can largely be avoided. Here are just a few of the questions to be asked:

Are we prepared, managerially, to continue operating the business if something should happen to the founder? If "no," what do we have to do to be prepared? This question could have not only managerial, but financial implications and include insurance, tax planning, gifts and other estate planning issues.
Are the "next generation" managers on a clearly defined executive track? Are their current jobs providing them with sufficient/appropriate training and experience?
Do the future sibling partners emphasize growth or profitability, and do they see things alike? Different objectives can wind up vying for prominence and causing conflict. That, in turn, can erode commitment to the business, and even result in shareholder fights.
Are there differences of opinion regarding day-to-day operations? Is quality uppermost to some, volume and distribution to others? Such differences, when perceived by employees, can cause disharmony and confusion, and erode productivity.

The Planning Process

Because it is a detailed, sometimes complex process, succession planning must get underway at least several years before the owner plans on exiting. It should focus not only on choosing the successor, but also on maintaining continuity, re-orienting the business under its new leadership, assuring that critical functions and relationships are maintained, and achieving financial equity among children actively involved in the business and those who are not, while preserving the parents' income. Here are some steps to follow:

Create a "family council" involving members both inside and outside the business. It is essential that the process and its results be the product of a collaborative effort. If the successors do not feel they had a direct hand in it, there will be no buy-in, and commitment can erode. A family council will promote open communication within the family about the business, estate and other family financial issues, and provide a "safe harbor" for members to express their views and concerns without reproach.
Create an updated vision for the owner, the successors and the business. To have any staying power, this vision must be a joint vision, incorporating not only the wishes of the owner/parents but also the dreams and ambitions of the succeeding generation. Moreover, it must, in effect, separate the "creator from the creation" - something not easily achieved when a good deal of the business's success undoubtedly derives from the owner's management and leadership style. The critical elements of that style must be distilled and clarified, so that they can be preserved institutionally.
Establish a board of advisors or directors to provide objective counsel, furnish needed expertise and guide the strategic planning effort. Candidates would include a trusted attorney, a CPA, a business consultant and perhaps a personal counselor.
Identify new generation leader(s) and define their respective roles and responsibilities. Articulating these clearly will erase confusion about roles and circumvent potentially damaging conflicts that could otherwise arise. It also will make it possible to account for differing managerial styles, create a common set of norms and re-define the corporate culture.
Set a departure date and establish a continuity plan for the business. The intent of the plan is to capture the thoughts, ideas and conclusions reached through the above process, and to provide for orderly transition. In this sense, the continuity plan is a variation on the strategic plan. It should, among other things, instruct the company whether to begin regenerating itself through aggressive growth & development, to stay the course for the time being, or to create an organization framework that will accommodate and support alternative forms of future growth. The plan also should address needs for professional development of the successors, the evolution of the corporate culture, the maintaining of key relationships with suppliers and customers, or ongoing contact with relevant community or government entities. It should include a vision for the business, a family mission statement, a summary of the key business strategy, a listing of key infrastructures, a list of key employees and their responsibilities, and a timetable.
Support and monitor the succession process. This phase is often overlooked, even when there is a plan. It involves building alignment and consensus, rallying the family and key employees around the new leadership, communicating goals and strategies throughout the company, and monitoring and evaluating the new leadership's performance and addressing problems that arise.

Companies that follow this process stand a much better chance of succeeding through the transition, than those that muddle through. Most importantly, the owner's most personal goals are far more likely to be realized, namely:

Preservation and/or protection of company assets.
Financial security for the owner and spouse in retirement.
A fair and equitable distribution of assets to the next generation.
Continued viability of the company and the course it is on.
Confidence in the new leadership.
Harmony and cohesion among the children.

Despite the challenges and possible discomfort, a sound approach to succession planning ultimately delivers peace of mind and assures the company's continued success and the family's harmony into the next generation of leadership.