Preparation for Succession

Preparation for Succession

Two scenarios: Leo is in his 80s. His daughter and son, both in their 60s, work in the business running critical parts of the day to day operations, but Leo comes to work every day, still owns all of the stock and makes all of the crucial financial decisions. Last fall, Leo suffered a health incident that left him mentally incapacitated for six months. The family could not legally make business decisions; if Leo died, all of the stock would transfer to his wife, who had never worked in the business. The wife and children are worried but even though Leo is now healthy, he still will not discuss the future. Across the country in another family business, Robert is in his early 60’s and healthy. His two sons work in the business and are assuming more and more of the day to day responsibilities. Robert has thought often about succession, but doesn’t know what to do. His boys are starting to get a little frustrated because they’ve been talking about it for three years yet nothing has happened.

One of the most daunting obstacles the family business faces is the passing of the torch, for both the family and the business. The statistics on successful transition are startling: 33% survive into the second generation, 12 percent into the third, and 4% into the fourth. There are estimates that over the next 5 years nearly half of family businesses will be in a state of transition from one generation to the next, but only 37% have written a strategic plan for succession. So how do you have a successful succession? The first is to get rid of the notion that a successful transition has only one definition. Success can be defined in a myriad of ways if the family stays open, flexible and honest about their goals and desires. Here are some successful transitions:

• Leadership from father to son, father to daughter, uncle to niece, etc.

• Non-family managers take over until the next generation acquires enough skills

• Operations are handed over to competent non-family leaders but family retains ownership

• Offspring begin satellite companies that are complimentary to the mother company

Why is succession so difficult? There are so many complex reasons, but without interested and able next generation family members, the business will not stay family controlled for long. Determining the interest and ability of next generation family members is not as easy as it sounds, and the decision does not rest on the senior generation alone. Even if you have capable and willing offspring, senior still needs to let go! So how do you have a successful succession? Over the next four months, leading up to the convention in October, I will be writing to you about components of succession and some ideas that may help you along the way. Here are areas that I will be focusing on:

• Planning early

• Communication

• Next generation preparation

• Letting go

Plan early: Start with the end in mind. Succession is a process, not an event. What does your life look like in 10 years? In five years? In the next year? Write it down on a piece of paper as best you can -- bullet points are okay! Succession is transition; transition, by definition, is “Passage from one form, state, style, or place to another.” The operative word there is passage: a journey. A journey takes time and may fail by getting lost, running out of gas, not having adequate lodging, whatever. If the interested parties in a succession all understand that it takes time, one hurdle is out of the way.

All family members, even spouses, need to think honestly and realistically about what their hopes and dreams are for the next year, the next five years, and the next ten. Reflect about your lifestyle, your income needs, the business needs and your industry outlook. What are your options? Just start by making a list of your wants, needs and potential challenges for the company. And then put it aside. After a little (not a lot) of time has passed (a week or month, but no more) take the list out and adjust as needed. Once you have your thoughts on paper, it’s time to start the communication process.

Next month: How to start communicating your hopes, dreams and ideas about the future.

Author

Deb Houden, The Family Business Consulting Group

comments powered by Disqus