Management - Develop a Business Succession Plan

A Guide To Transitioning Your Family Company

Develop a Business Succession PlanIf you're content to wait until retirement to create a family business succession plan, Sally Stolen Grossman feels you're making a big mistake. "I think it's never too early to start. Succession planning is just so important," says Grossman, co-editor of the Business Succession Planning Answer Book. "I see far too many owners who wait until the last minute, and it's much, much harder to do the planning then."

But succession planning doesn't have to be a headache. Here are some suggestions for making the process easier on you and the rest of your loved ones.

Decide on a Successor
Grossman believes choosing an in-family successor among competing children is probably the most difficult decision that entrepreneurs will face. "Assuming that you have family that might be interested in the business, you have to do some soul-searching about what the job involves, and whether your kids have the skills and the desire," she says.

That's why Grossman strongly recommends bringing in an outside organization to conduct a professional assessment of family members. The assessment should include skill and interest testing to find out whether the family members you have in mind are well-suited to grab the company reins when that time comes. "There are professional family business consultants who specialize in that, and they're very good at it," Grossman says.

Set Ground Rules
During the succession planning process, Grossman advises business owners to determine specific expectations so everyone knows what they're getting into.

"It's very difficult to completely remove the emotion from the process, and I think that's because, by definition, it's a family business," Grossman says. "When you talk about business, you may talk about it at the Thanksgiving dinner table. But there are some things you can do to minimize the emotion. One is to set some ground rules."

Among the questions Grossman suggests answering are: Is the process going to be confidential? Is it going to be shared with somebody? Are spouses going to be involved in these discussions?

Once you establish the process, the next step is to try to prevent triangulating. "You don't want to have a situation where Johnny's going to come to Dad and say, ‘Suzy said this,' or, ‘I'm upset with Suzy about this.' Make people deal with each other directly," Grossman says. "That healthy relationship stuff is a good place to start."

Keep Communication Lines Open
Grossman feels regular conversations and transparency during the consulting process is crucial so everyone involved can be happier, both personally and professionally.

"You may not want to lay out all of your preliminary plans," she says, "but at least to some extent in the information-gathering process, I think it's good policy along the way to communicate. Even if it's to say, ‘Here's where we are in this process, we've interviewed all family members, we're taking into account what you think, and the next step will be X.' The more communication, the better, because when you don't talk, people start to spin their own story about what's happening."

The Tampa Bay Business Journal's Jo-Lynn Brown, author of the article "Succession planning in a family-owned business," agrees that a lack of communication can lead to unnecessary drama, "particularly if you're dealing with multiple generations – children, grandchildren, cousins, brothers and sisters," she says. "Any drama during a time of transition can be very harmful to a company. You can lose customers and revenue."

Brown says transparency needs to be sustained all the way through the succession planning process, and even after the process is complete. "Make a very clear outline of what you want the family to do in the event of someone passing unexpectedly or just retiring," she says.

Think About Fairness Differently
Grossman says the best family succession plans are fair-minded, yet logical. In other words, trying to keep all family members happy simply for the sake of fairness is not a winning business formula.

"A lot of owners come to me and say, ‘I have four kids and I want to treat them all fairly, so I'm going to give them all one-quarter of the voting stock.' I shake my head and say, ‘Usually, that's not a good plan,' " Grossman says. "Usually, one of those kids is active within the company, and the other three aren't."

So then, what exactly should your approach be? "What we do is help the entrepreneur find a way to equalize – to treat the other kids fairly – but to get off the idea that it has to be identical," Grossman says. "And once people know they're being treated fairly, that helps cut down on the emotion."

Consider Company Culture
Having a child with experience lead your company is certainly a plus, but Brown says it's just one component that owners need to consider in developing a succession plan.

"Something I think might get overlooked is the leadership style of whoever you're considering to take over the reins," she says. "Every company has a culture, and that can really affect the dynamic of the company, the management style, and the leadership quality that the new ownership might possess. Will the person stepping into that maintain a sense of normalcy for the employees of the company?"

Selecting a family member whose personality or overall business vision may be drastically different from yours may upset a delicate employee dynamic. "For example, if you look at a company like Google as opposed to a company like Bank of America, they have different ways of doing things and different expectations from employees of those companies," Brown says. "You don't want to have someone step in who drastically changes the feel of the company – the way it functions or some of the traditions. You might lose a lot of your employees that way."

Be Open to Outsiders
It may not be easy to accept, but if consultants find out that none of your kids really want to carry on the business, you have to think about leadership alternatives.

"We know this has happened before: The parent wants to leave his oldest child the company and keep it in the family, and the child doesn't want it. The next generation wants to do something else," Brown says. "The goal of every business is to continue to grow its profits and revenue. It really does no good to leave your business to someone who's ultimately going to destroy the business."

Grossman says there are always other options if family members pass on running your company. "You can transfer the business to other shareholders, managers or employees," she says.

Update Your Plan Often
Whatever succession plan you ultimately choose, Brown says it should be revisited on a regular basis.

"It needs to be updated frequently – every year or every other year – because the dynamic of a family-owned business can change," she says. "Somebody gets married, somebody gets divorced, or somebody has a child. So, particularly for family businesses, there needs to be some follow-up to it. You can't always know when an emergency situation will take place and the company will need to start going through a transition process."