Meeting the Challenges of Succession in the Family Firm

Meeting the Challenges of Succession
in the Family Firm

by Thomas Davidow and Richard Narva

Succession from one generation to another does not happen by accident in a family-ownedbusiness.If you are interested in succession or the continuity of your business, you mustunderstand that planning for that continuity is the critical factor.We believe the failure toadequately address the topic of succession is the primary reason that only 30% of familybusinesses continue into the second generation and that only 10% more continue into the third.

Succession exists as an underlying issue in all family firms, playing a tremendously importantrole in the life of the family, as well as the life of the business.Yet owners and operators offamily enterprises rarely address succession, apparently because of its powerful psychologicalimplications, which can sometimes be overwhelming.

Admittedly Succession Is A Complicated Topic

Thinking about and dealing with succession can be extremely demanding, both emotionally andintellectually.When you begin to examine the concept of succession, you must deal with aging,mortality, control and power, just for starters.In addition, the business issues that foundersmust simultaneously deal with include ownership, management, strategic planning, and replacingthe professional relationships from one generation with the next generation.These relationshipsinclude key non-family managers, clients, suppliers, lawyers, accountants and bankers.

Succession Forces Business Owners To Make The Hard Choices

When more than one member of the next generation is active in the management of the familyfirm, the senior members may feel they’re being forced to choose one child, for instance, over another. Most parents spend their lives trying to convince their kids that they are all lovedequally, but in this situation, the founder and his or her spouse must make a decision thatdirectly contradicts this message.

Let’s face facts:The prospect of the next generation running the business when there is just”one seat at the head of the table” can put tremendous strain on family relationships.This isparticularly true when a sibling rivalry is fueled by a competition to get to the top of thecompany ladder.

What Does A Family Business Represent?

The symbolic and real power of a family business cannot be overestimated.Family members’ connections with the business can profoundly affect their individual self-esteem, as well as thequality of their relationships within the family.

But in addition to giving the family an identity in the community, the family business canbecome the playing field on which many family issues get acted out.For instance, when families start tackling the problem of succession, many of the unresolved family and business issues begin surfacing. And because people generally tend to avoid dealing with difficult issues, these matters build up over time and may take on an almost mythical power. This powerfultension only serves to discourage a family from facing up to the underlying problems.

How To Start Dealing With Succession

It is critical to the health of both family and business to deal with succession as soon as possible.This effort requires patience and delicate handling, but it definitely can be accomplished. The key is simply to face reality.We find that fantasy is usually more frightening than reality.That is to say, the consequences of dealing with succession are generally more frightening in one’simagination than they are in reality.

Succession is not a decision.It is an organized process that involves discussion, information-gathering, evaluation, research, asking necessary questions and much more.If you address theissue of succession as a process that includes all family members, the power and the tensionassociated with the decision will be significantly reduced.

Nine Helpful Steps Toward Succession

To encourage families to discuss the issue of succession, we have devised a few ground rulesfor approaching the problem.

  1. All family members, whether active in the business or not, need to be put on notice that theprocess is about to begin. 
  2. Family members active in the business (and if you wish, key outside advisors and/or non-family managers) can become a committee to examine the issue. 
  3. The first question to be considered is:Are we prepared managerially to continue operatingthe business if something should happen to the CEO tomorrow? 
  4. If you answered “Yes,” great!The second question for discussion is:What are the plansfor the next generation, and are these younger managers on a clearly defined executive track?Are their current jobs providing them with the necessary training and experience? 
  5. If you answered “Yes,” great! (You may stop here). 
  6. If you answered “No,” the question on the table becomes:What training and supervisiondo they need, and what are their expectations for their future in the company, and are thoseexpectations reasonable? 
  7. If your answer to Number 3, above, is “No,” the next question is: What do we have to do to be ready for the possibility that the owner or father could be absent from the firm tomorrow? This could have financial as well as managerial implications, such as insurance, tax planning,wills and other estate planning issues. 
  8. After you have addressed the immediate problems, then ask yourself what the ideal situationwould be.Try to describe it. 
  9. Begin the planning process that could make that dream a reality. Please notice that the firsteight steps are questions, not answers. Continuing to ask the right questions is more important than answering them immediately.

When you ask the right questions, the answers are likely to emerge through dialogue.

The steps described above will require a commitment of time–in some cases, as little as two hours every month.It has been our experience that business-owning families are highly skilledat making dreams become a reality.The succession problem is merely another intellectual problem to be solved.It can be an extremely difficult and complicated process that may at times seem to be an endless and unsolvable dilemma. However, if one approaches the process in an organized manner, it’s possible to preserve the business and the family.