Management Succession Issues in Family Business (Part II)

Management Succession Issues Cornell University
in Family Business (Part II)

by Bernard L. Erven, Professor and Extension Specialist

The Characterization of Effective Successions

The empirical data and anecdotal evidence are overwhelming on failure in the second and third generations of family business that were successful in the first generation.Buchholz and Crane report that 30% of family businesses in this country survive to the second generation and only half of these first generation survivors make it to the third generation.(Buchholz, p. 15)An obvious challenge to family business extension programs in human ecology and agricultural sciences is to alert family businesses to the keys for continued operation.

Handler (1994) reviewed the literature on effective successions.She wanted to answer the question, What characterizes them?Not surprisingly, she reported characteristics of effective successions from a diverse set of research reports rather than a conclusive set of guidelines for success.Following are five actions for management succession success consolidated from her list of more than 15 factors extracted from the research literature on management succession:

  1. Select managers for the next generation.A person can rarely be successful in declaring himself or herself the new manager.  
  2. Put in place a comprehensive development program for these managers.There needs to be some combination of formal training, self-study, mentoring, communication, performance evaluation, strategizing about overcoming specific weaknesses and employment outside the family business.Manager development comes through an active process rather than simple assimilation through watching “mom and dad do it for years.”  
  3. Provide opportunities for next-generation managers to fulfill their personal and career goals.Delegation of specific responsibilities and the necessary authority is also important.  
  4. Develop plans for management succession, strategies for the continued operation of the business, retirement of the current managers and transfer of assets before and through the estate.Base plans on realistic assessments of the past and present, and reasonable expectations for the future.The plans need to stay flexible while providing for timing of the transfer, responsibilities of family members during and after the management succession, the specific arrangements for a testing period and financial security of current owners.As mentioned previously, the plan is for a process not a single transfer event.  
  5. Develop positive associations and good working relations among the family members in all generations in and out of the family business.Strained relations makes the inevitable need for compromise difficult if not impossible. As a practical matter, family business managers are unlikely to use a long check list to guide their actions.Identifying key actions which affect the management succession process can be a helpful starting point in developing a strategy for management succession that is responsive to the specifics of the case. The succession strategy will be evolutionary as changes occur in family members and employees, the culture of the business and the external business environment.Moreover, at any point, a health, marriage, weather or economic calamity may divert the best planned strategy for succession.

Management Succession Paradigms

The issues and implications presented in the previous section will have little impact on researchers and extension educators constrained by obsolete paradigms about management succession and family businesses.As a means of summarizing key points for the human ecology and agricultural sciences, old and new paradigms about management succession are suggested.The new paradigms should be especially useful to those designing extension programs for family businesses.They are general statements and thus can not capture all the germane points about management succession in family businesses.

The paradigms labeled as “new” are designed to have relevance for both human ecology and agricultural sciences rather than having a separatist family or business orientation.The paradigms labeled “old” are designed to summarize the more traditional views of management succession which have dominated the islands of programming in management succession in human ecology and agricultural sciences.

New:Some families will decide, for good and justifiable reasons, to liquidate their successful businesses rather than pass them to the next generation.Old: Managers of successful family businesses oppose liquidation in their life times and believe they owe the next generation the opportunity to continue heir businesses.

New: In management succession, family and business concerns are overlapping and inseparable.

Old: In management succession, the business concerns dominate and family matters are secondary and separate.

New: Specialists in human ecology and specialists in agricultural sciences each have the potential for contributing to improvement of quality of family life and quality of business management.

Old: Quality of family life and parenting are the domain of human ecology specialists; business management and production technology are the domain of the agricultural sciences; separation increases the contribution of each group of specialists.

New: Mission and goals for the family business continuously address management succession.

Old:Management succession, retirement planning and estate planning are relevant issues only at the end of the founder’s career.

New: Planning of management succession encompasses the extended family.

Old: Planning of management succession concerns only the people directly involved in ownership and operation of the business.

New: Successful management succession does not guarantee the long-run viability of a founder’s thriving family business.

Old: A family business thriving in this generation depends primarily on management succession to be successful in the next generation.

New: Employment outside the family business may provide essential perspective, maturity and experience necessary for success in the family business.

Old: Haste in joining the family business is essential because the opportunity may be lost.

New: Joining the family business as an employee in a non-management capacity with a formal job description and regular performance evaluations provides a beneficial testing period both for the family and the family member employee.

Old: Family members come into the business as managers and co-owners so that they have an immediate sense of responsibility, importance and commitment.

Research Questions

Additional research would greatly benefit extension programs in business management succession.The following list of researchable questions stems from the author’s work with farm families involved in management succession.However, many if not all of the research issues are likely to be relevant for non-farm family businesses.

  • How can management succession concerns be integrated on a continuous basis into strategic planning and in particular into mission statements?In strategic planning, the typical implicit premise is that the current generation of managers will continue indefinitely.  
  • In what order should tangible business assets be transferred to the next generation?In liquidation of a business, transfer of assets to the next generation is relatively easy.Sale and division of the resulting cash provides a fall-back strategy.Continued operation of the business while assets are being transferred lacks an easy fall-back position. For farm businesses, the order of transfer can be by type of tangible property: breeding livestock; inventories of grain, hay and feed; machinery and equipment; and land and buildings.A concern with the order in which assets are transferred suggests that management succession ought to be an orderly process to minimize disruption of the business rather than a single crisis event.Further, tax planning should be an integral part of the asset transfer planning.

     

  • What intangible transfers need to be explicitly included in the succession planning?The list of important intangibles is long: responsibility and authority, goodwill, organizational “memory,” leases, informal agreements, chairing of staff meetings, representation of the business at community functions, check writing authority, and employee hiring and compensation authority.The handling of these intangible transfers sends important signals about power, identification and acceptance of the next generation of managers and unresolved succession problems.  
  • How much income does the founder require to maintain the expected level of retirement living?Can the business support the retired founder, meet the expected family living expenses of the next generation and still have the necessary operating and investment capital for the business?Some family businesses simply are not sufficiently profitable to meet all the financial obligations.  
  • What is the role of investments outside the family business and life insurance in facilitating transfer of the businesses to the next generation?The “unified credit” provided for in federal tax law allows each person to transfer $600,000 free of federal tax by gift before death or through an estate.However, some businesses have assets greater than $600,000 that lead to estate taxes that can be devastating especially to businesses already financially stressed.There are also state taxes, immediate cash payments to other heirs, and the founder’s early death that can leave the next generation unprepared for its financial obligations.  
  • How does size of business in terms of assets, equity, number of people in the management team, and number of employees affect management succession success?Larger businesses tend to be more complex and formal than small businesses.Thus, some informal management succession practices that work for small family businesses may be inappropriate for large family businesses.  
  • How do outside careers of family members, especially in-laws, enhance and/or impede management succession?Use of outside earnings, competition for time, degree of involvement in the family business and outside career planning obviously impact management succession.Less obvious are issues of self-esteem of the person who has outside employment, sharing of parenting responsibilities, family members acceptance of in-laws’ lack of interest in the business and the disruption of outside careers by seasonal pressures and catastrophes in the family business.  
  • How do family values, importance placed on parenting, and roles and importance of the extended family impact management succession?Family businesses challenge managers.Family responsibilities require time and commitment.A host of issues provide the continuing potential for conflict: family versus business goals, excellence in parenting versus excellence in business management, family living expenditures versus business expenditures, and family employees versus non-family employees.  
  • How do outside boards of advisors enhance and/or impede management succession?What roles can these boards play that are particularly helpful to the succession process?In particular, what are the necessary abilities of board members to play critical roles in such activities as initiating the planning process, resolving conflict among family members, and asking the “tough” questions insiders dare not or will not ask?What is the composition of successful boards in terms of size, experience, previous or current contact with the family and business, inside or outside the local community, and family business experience?  
  • Which communication techniques work best in making the non-management family members part of what is happening in the business?Regular and effective communication is essential to understanding of the succession plans.Informal and occasional communication can create more confusion than understanding.Communication techniques to be considered include: regular family meetings with agendas and minutes, regular tours of the business, financial summaries provided to all family members, detailed explanation of estate and retirement plans and annual written reports by management to all family members on progress of the business.  
  • Under what circumstances does experience outside the family business facilitate a family member’s joining the business?Is there some minimum number of years of experience that is helpful and some maximum number of years before the family member is too removed from the family and business to become a successful top manager in the business?  
  • How do estate taxes and payments to family heirs not in the business impact management succession?Even the financially strongest family business can be devastated by taxes and required payments to family heirs outside the business. The legal, tax and business organization questions need to be handled with the assistance of experts who see the long-run financial implications of the succession plans as well as the operational and emotional implications.  
  • Which personality types of the founder and next generation facilitate development of the necessary working relations between the two generations?Which personality types are most likely to lead to unresolvable conflicts?Identifying personality types early in the management succession process and then dealing directly with the implications should be helpful to developing the necessary working relations between the two generations.  
  1. What are key indicators that can be used to determine the role, perhaps necessity, of non-family members on the management team?These indicators may include business performance measures; knowledge, skills and abilities of the current managers; potential for management responsibilities among the next generation of family members; and confidence in the current and future management team by lenders, landlords and other business partners.