The primary cause of family businesses’ lack of continuity is inadequate estate planning, failure to create a management succession plan, and lack of funds to pay estate taxes. In addition, siblings rivalry, fights over control of the business, and personality conflicts often lead to nasty battles that can tear families apart and destroy once-thriving businesses. The best way to avoid deadly turf battles and conflicts is to develop a succession plan for the company.
Although business founders inevitably want their businesses to survive them, they support their intentions with a plan to accomplish that goal. Often the reason for failing to develop a succession plan is that the entrepreneur is unwilling to make tough, and potentially disruptive, family-oriented decisions that require selecting the successor.
Family feuds often erupt over who is (and is not) selected as the successor in the family business. For these companies to have a smooth transition from one generation to the next, they must develop management succession plans. Succession planning reduces the tension and the stress created by these conflicts by gradually “changing the guard”. A well-developed succession plan is like the smooth, graceful exchange of a baton between runners in a relay race. The new runner still has maximum energy; the concluding runner has already spent her energy by running maximum speed. The athletes never come to stop to exchange the baton; instead, the handoff takes place on the move. The race is a skillful blend of the talents of all team members; the exchange of leadership is so smooth and powerful that the business never falters but accelerates, fueled by a new source of energy at each leg of the race.
How to develop a management succession plan?
1. Select the successor: there comes a time for even the most dedicated company founder to step down from the helm of the business and hand the reins over to the next generation. Entrepreneurs should never assume that their children want to take control of the family business. It is critical to remember at this juncture in the life of a business that children do not necessarily inherit their parents’ entrepreneurial skills and interests (sometimes). By leveling with the children about the business and their options regarding a family succession, the owner will know which heirs, if any, are willing to assume leadership of the business. When naming a successor, merit is a better standard to use than birth order. When considering a successor, an entrepreneur should consider these actions;
Make it clear to every family member involved that he or she is not required to join the business on a full-time basis. Family members’ goals, ambitions, and talents should be foremost in their career decisions.
Do not assume that a successor must always come from within the family. Simply being born into a family does not guarantee that a person will make a good business leader.
Give family members the opportunity to work outside the business first to learn firsthand how others conduct businesses. Working for others allows them to develop knowledge, confidence, and credibility before stepping back into the family business.
One of the worst mistakes entrepreneurs can make is to postpone naming a successor until just before they are ready to step down. The problem is especially acute when more than one family member works for the company and is interested in assuming leadership of it. Sometimes founders avoid naming successors because they don’t want to hurt the family members who are not chosen to succeed them. However, both the business and the family will be better off if, after observing the family members as they work in the business, the founder picks a successor based on that person’s skills and abilities.
2. Create a survival kit for the successor. Once she identifies a successor, an entrepreneur should prepare a kit a survival and then brief the future leader on its contents, which should include all of the company’s critical documents (wills, trust, insurance policies, financial statements, bank statements, key contracts, corporate bylaws, and so forth). The founder should be sure that the successor reads and understands all the relevant documents in the kit. Some other steps that the owner should take to prepare the successor to take over leadership of the business include;
Creating a strategic analysis for the future. Working with the successor, entrepreneurs identify the primary opportunities and the challenges facing the company and the requirements for meeting them. The goal is to help the successor understand the company’s history and traditions while viewing it through the lens of the current and future business environment.
Explain the strategies of the business and its key success factors.
Discuss the values and philosophy of the business and how they have inspired and influenced past actions.
Discuss the people in the business and their strengths and weaknesses.
Make a list of the firm’s most important customers and its key suppliers or vendors and review the history of all dealings with the parties on both lists.
Develop a job description by taking an inventory of the activities involved in leading the company. This analysis can show successors those activities on which they should be spending most of their time.
Document as much process knowledge – “how we do things and why” – as possible. After many years in their jobs, business owners are not even aware of their vast reservoirs of knowledge. For them, making decisions is a natural part of their business lies. It is easy to forget that a successor will not have the benefit of those years of experience unless the founder communicates it.
3. Groom the successor. Typically, founders transfer their knowledge to their successors gradually over time. The discussion that set the stage for the transition of leadership are time-consuming and require openness by both parties. Grooming a successor is the founder’s greatest teaching and development responsibility, and it takes time and deliberate effort. To create ability and confidence in a successor, a founder must be:
Patient, realizing that the transfer of power is gradual and evolutionary and that the successor should earn responsibility and authority one step at a time until the final transfer of power takes place.
Willing to accept that the successor will make mistakes
Skillful at using the successor’s mistake as a teaching tool.
An effective communicator and an especially tolerant listener.
Capable of establishing reasonable expectations for the successor’s performance.
Able to articulate the keys to the successor’s successful performance.
4. Promote an environment of trust and respect. Another priceless gift a founder can leave a successor is an environment of trust and respect. Trust and respect on the part of the founder and others fuel the successor’s desire to learn and excel and build the successor’s confidence in making decisions. Developing a competent successor over a five-to-a-ten-year period is realistic. Empowering the successor by gradually delegating responsibilities creates an environment in which all parties can objectively view the growth and development of the successor. Customers, creditors, suppliers, and staff members can gradually develop confidence in the successor. The founder must be careful at this stage to avoid the “meddling retire syndrome” in which they continue to report to work after they have officially step down and take control of matters that are no longer their responsibility. Doing this undermines a successor’s authority and credibility among workers quickly.
Grooming a successor can begin at an early age simply by involving children in the family business and observing which one has the greatest ability and interest in the company.
By levelling with the children about the business and their options regarding a family succession, the owner will know which heirs, if any, are willing to assume leadership of the business. When naming a successor, merit is a better standard to use than birth order.