How an Effective Succession Plan Can Mean More Freedom and Control

 How an Effective Succession Plan Can Mean Northeastern University
More Freedom and Control

Family Business Quarterly
by Joseph F. Blum, CLU

Owners can be divided into one or another of two distinct groups as regards succession planning. One group absolutely refuses to recognize the need for succession planning. It just doesn’t see the need, period. When the attorney representing the DeBartolo family, one of the country’s most prominent developers of shopping malls, was interviewed for a Wall Street Journal article and was asked about his client’s attitude toward succession planning, the attorney was quoted as saying, “We introduced the topic of succession planning at a recent meeting and quickly learned that it was a subject never to be mentioned again.” Mr. DeBartolo was 78 years old at the time.

The second group, in sharp contrast, is attuned to the need for planning. Typical of this group is the chicken magnate Frank Purdue, who understood the value of advanced preparedness. In company TV ads, the elder Purdue refers to his son, who viewers soon learn has assumed control of the company, as “a project in the making for many years.”Purdue Senior obviously takes pride in having handed off the baton of his business to his son in a highly public way, based on having worked out a competent succession plan at an early stage.

What accounts for the different attitude? It is not education, or the type of industry, or even the social or ethnic background of the business person that explains whether the individual will be receptive to adequate advance succession planning. It is really more a question of whether somebody–perhaps the owner’s attorney, or a worried family member, a banker, investment advisor or insurance planner–finally got the owner’s attention and kept it focused on the need to do a succession plan.

Most business owners put off doing their plan because they simply refuse to contemplate their mortality. Yet another reason for procrastination has to do with control. Compared with most people who are willing to work for others as employees, the entrepreneur-founder is more apt to place a high value on control. That may well have been one important reason why he decided to work for himself! Telling a business founder that he or she needs to think about turning over the business to the kids can arouse great emotional resistance. The parent-founder-CEO may be thinking, “If I give Johnny the keys to the business, will my son soon be greeting me at the cashier’s desk with the words, ‘Hi Dad, here’s your paycheck.’?” But family business life need not turn out that way.

Maintaining Control While Letting Go

How can the founder continue to exercise control but pass along control to the next generation at the same time? It sounds like a paradox.

In fact, a good succession plan can spell freedom and a new type of control for the senior generation. Transferring ownership in the business need not lead to dependence on the new management of the family enterprise–the kids who now have the keys to the company. The founder can both maintain control and, without paradox, let go of the reins at the same time.

There is an important difference between the day-in-day-out job of running the business–the hard job of managing the business–and the responsibility to make sure that the business is traveling in the right direction with a sound investment, product development and marketing strategy. It is the difference between being in the cab of the train, driving the engine and stoking the boiler, which is management’s job, and overseeing the organization of new routes, major investment decisions and other strategic issues, which is the board’s job. It is not necessary to be on the train at all. The overview can be provided by the board–and operate from Florida, or Arizona or wherever one decides to retire.

By keeping a seat on the board, owners can retain ultimate control, especially if they keep the lion’s share of the voting stock. Equity ownership can also gradually shift to the next generation even while keeping voting control. Eventually full control might follow, but not until that decision has been consciously made and the founder is secure in the knowledge that the business is in good hands. This will ensure that the founder’s and the founder’s spouse’s retirements are secure as well.

A Numbers Problem

Turning the family business over to the younger generation has always been beset with difficult choices. This is especially so when the newcomer generation is numerous–with three, four, five, maybe even more, brothers and sisters, perhaps with a few cousins thrown in for good measure, which is often the case if two brothers, or a brother and sister started the business together a generation or two back.

When there is only a single child, succession planning is usually less complicated. A succession plan is, however, still necessary and there can still be complications. For example, if a child who was trained to run the business and whom the founder counted on to take over decides instead that he or she isn’t interested in the business, or if a child who was expecting to enter top management turns out to lack the necessary skill or business judgment, then the founder will very definitely need to give serious thought to alternativesuccession options–and this may be painful. The owner may have to integrate those alternative options into the “estate planning” part of the succession arrangement.

Avoiding Postmortem Distress

The distinction between “who shall get the business” and “who should get the business” is often critical to a family business’ continued success. The gifted daughter who clearly understands the mission and operations of the business may never get the opportunity if the eldest son, who has worked himself into the management, immediately seizes the reins when the founding parent dies. If ever there was a good reason for having a written, legally valid plan, that is clearly it.

Keep in mind, however, that the plan doesn’t solve this particular problem; it merely ratifies and guarantees a solution that was conceived of prior to death or retirement. The founder must give serious thought to the matter of who in the family is most competent to run the company and, indeed, feel confident that there is in fact somebody in the family with the necessary competence.

If nobody in the family is interested in the business, or if divisions in the family have occurred because of divorce, then the best succession plan may well be the sale of the company, or the importation of professional non-family management into the company. Also, if the business will have a hard time supporting both the retired senior generation as well as the younger generation, then selling the business may be the best arrangement for all concerned.

Getting ready to plan. Here are a few tips for organizing succession planning.

  • Set a date to have a written plan draft ready for review by others. Think of each goal to be achieved, including the interests of others whom you think should be taken into account. Write that down in detail. 
  • Invite comments from all family members, and ask them to have their comments by a fixed date. Deadlines make things happen! 
  • Make appropriate revisions based on this feedback. Consider inviting comments from those intimately connected with the company-for example, bankers and other important lenders, employees and key advisors as well as the outside board members. 
  • Others may also be included in the consultation process–for example, a board of advisors if the company has one, the family business consultant and the outside legal counsel. When there is apt to be dissension, or where discussion of succession is clearly painful for certain family members, a psychologist skilled in family business dynamics and systems should be included into the discussions. Even the most rational and clearly optimal succession strategy can flounder if the emotional seas in the family are turbulent–if sibling rivalries or old feuds have been allowed to get in the way. A family business psychologist can often help with this kind of problem.

The Roman aqueducts still stand after many hundreds of years because the stones fit together perfectly, with each stone in the pillar supporting the structure. In a family-owned business, good advance planning is the force that can bind the family through the generations, keeping the various branches and generations of the family in the business, until the day arrives (if ever) when they decide that the time has come to sell the company and move on to something else.

Joseph F. Blum, CLU, is the founder and chairman emeritus of the Northeastern University Center for Family Business. Professionally, Blum represents MassMutual Life Insurance Co. and is a nationally recognized lecturer and author on matters dealing with estate and succession planning for family-owned businesses.