Succession Planning

Succession Planning

by Adriane B. Miller

Small, closely-held companies must confront this thorny issue.

John R. Beever doesn’t know how his business would function if he fell out of an airplane today–but he’s prodding his family and key managers to discuss it.

Mr. Beever, 59, runs family-owned John Dittmar & Sons, Inc., a Baltimore custom woodwork manufacturer that his great-grandfather started in 1876.

But discussing the future raises difficult questions. Mr. Beever’s two sons, Geoffrey and John C. are in their 30s and vice presidents of the firm. Both are enthusiastic about the business, both are bright. Both want to succeed their father.

What son does the senior Mr. Beever choose as successor? Will that son be able to steer the company through a new era? And will Mr. Beever be able to let go and watch others toil without him?

By confronting tough issues about the strength of his business and who will succeed him, Mr. Beever is far ahead of most small company owners, who wait for unexpected events to trigger difficult decisions.

“Planning the transition and continuity of succession is the single most courageous act a leader can do,” says Ivan Lansberg, director of Yale University’s Program for the Study of Family firms. “Succession planning really confronts you with your own mortality. It requires getting with the kids and talking about when you are no longer going to be around. A lot of families don’t want to do this.”

But if they don’t, he says, the likelihood of getting everyone to agree on a future direction of the family company is slim. And without a vision from its owners and managers, a closely-held company won’t survive.

Closely-held companies account for about 90% of all businesses in Maryland, according to figures from the state Department of Economic and Employment Development and Loyola College of Maryland’s Center for Closely-Held Firms. Harsha B. Desai, center director, estimates that closely-held firms control about 77% of the state’s total payroll.

“Succession should never be an event,” Mr. Lansberg says. “It should be a process. If it becomes an event, you have a problem.”

The process requires owner/managers to deal with a slew of sticky questions: How can they choose among several capable successors? What happens if no one in the family is really interested in taking over?

Corporate heirs have to face theory issues of their own: What if the older generation won’t discuss or even think about succession?

What if they retire but won’t relinquish authority? Should the company continue a family business at all or be sold?

Transferring power may not be comfortable, but it can be graceful and profitable, Mr. Lansberg says. Here are some key issues that owner/managers must confront:

  • Is continuing the business into the next generation in the best interest of family members? “Don’t assume you should keep it in the family,” Mr. Lansberg says. “In a lot of cases, the family might be better off selling the business.”

     

  • Can family members handle the stress that continuity planning with cause? Owner/managers also must decide whether their egos will allow them to plan and transfer power to the next generation.

     

  • Who should be included in the decision-making? Include all owners, key family members and key managers in decisions that will affect them, says Mr. Lansberg. He recommends establishing family councils and boards of directors to regularly air issues and develop policies. A family council might be limited to immediate family members, or might include cousins, ex-spouses and stepchildren.

    A board should be staffed with competent outside directors, “not golf buddies or you lawyer,” Mr. Lansberg says, “but peers with companies a little bigger than yours who are willing to systematically ask tough questions.”

    H. Martin Fetsch, a partner with C.W. Amos & Co. accountants in Baltimore, defends the use of lawyers and other professionals on boards. “They can focus on the business and don’t get caught between disagreements among family members. Our client is the business, not the family members.”

     

  • What is the vision for the family business? “Unless you know what the vision is, you won’t know what kind of leaders you need to develop,” Mr. Lansberg says.

     

  • What qualities should the next company leader have? Selecting the future chief executive and top management team, and beginning their training, is crucial. Mr. Lansberg cautions against selecting a person based on his similarity to the present owner/manager.

    “Dealing with success for many people is ‘How do we clone Dad,'” he says. “The skills Dad had may have been wonderful for getting to this point, but they may be horrendous for the future.”

     

  • How can important contacts be transferred, along with the title of owner? Many successors complain they are snubbed by longtime clients, critical suppliers and bankers who don’t want to deal with a “junior.”

    Ralph W. Emerson, Jr., a vice president of First National Bank of Maryland, says the problem isn’t likely to go away, especially in the frosty banking climate.

    “Bankers often face monarchies,” he says. “We want owners to stay on, to personally guarantee loans. It’s like a relay race–if the baton gets dropped it not only affects your business, it affects a lot of other people too.”

    The outgoing owner must help the corporate heir develop and nurture relationships with important company contacts, Mr. Lansberg says.

     

  • How can the owner make a graceful exit? Once owners decide to go, they should go quickly–and not look back. Previous owners who gave up control but kept their finances tied to the company sometimes are forced to watch the next generation or a nasty recession squander their life’s work.

    “It’s a very sad place to be at 75 years of age, after spending a lifetime of investing in a company, to see it go down,” Mr. Lansberg says.

    “When you get out of the cockpit, get off the plane,” he suggest. “If the pilot wants to do hula hoops under the Brooklyn Bridge you don’t want to be there.”