Family business succession: 12 steps

The process of family business succession planning may take five years or more. Any family business that starts this process only at the time the need for succession arises will find that it is too late.

This failure is one of the primary reasons why fewer than 25 percent of family businesses pass on to the second generation and as low as only five percent make it to the third generation.

Another misconception is that planning and successful succession are one and the same process. These are two different processes. Transferring to the next generation or succession must be viewed as a lifelong and continuing process which will continue even after the first generation passes away.

In my conversations with many family business owners, they are often worried about the continuity of the business, but not worried enough to do something about it. Often, it is only the reminder of their mortality – a heart attack, the death of a close friend or relative or a bitter family argument – that finally persuades them to start thinking about succession planning.

However, before or even during the planning process, there are many stops and starts, even if the owner-manager knows that planning is the right thing to do.

Emotional forces often prevent the owner-manager from facing the issues. Again, in my conversations, I am often told that there is a succession plan but it is not written and is only in the owner’s mind. It is also a plan that has not been thoroughly communicated to family members.

Family business consultant Ivan Lansberg accepts the complexity of the succession planning process. However, he advises that 12 tasks must be accomplished during continuity planning.

“Task One: Decide whether you want to continue family ownership.”

This is an extremely difficult issue to discuss and is thus typically avoided. While the older generation may be deeply attached to the firm, the next generation may not be interested in the business or in working with siblings. Continuity requires that those who will take charge of the company’s future have to develop a firm commitment to the business and to one another.

“Two: Assess whether the family can withstand the stresses that continuity planning inevitably generates.”

The planning process will be at times be painful, and when it is finished, not everyone may be satisfied with the results. It requires hard decisions like distributing economic assets or giving favored positions to some over others.

“Three: Get the owner-manager(s) to agree to actively manage the development of a continuity plan and the transition in leadership to the next generation.”

The owner-manager must not only agree to come to terms with the letting go but also to actively manage the design and implementation of the plan.

“Four: Consult and actively involve other major stakeholders in the process.”

The views of those whose lives will be affected by the plan should be solicited whenever possible, as their support will be necessary in carrying out the plan.

“Five: Set up appropriate forums for reaching consensus on key issues.”

At least three structures should be developed: a family council to discuss family issues, a functioning board of directors to deal with ownership and policy issues and a succession task force to elaborate the strategic aspects of the plan and assist in the training of the successors.

“Six: Develop a clear vision for the future of the business that all key family members can enthusiastically share and that spells out the role each will play.”

“Seven: Choose a successor and other candidates for the future top management team, and plan a course of training for each.”

“Eight: Help the successor build authority in the family and in the business.”

A continuity plan provides for the transfer of power and authority. Power refers to a person’s capacity to influence the behavior of others. Authority refers to a person’s right to influence others, which means that his or her power is regarded by others as legitimate.

“Nine: Design an estate plan that specifies how ownership of the enterprise will eventually be distributed among the members of the next generation.”

Some business owners plan their estates with lawyers, and family members learn the details only after the owner’s death. That can lead to misinterpretations of the parents’ real intentions and to bitterness among heirs.

“Ten: Make sure family members understand the rights and responsibilities that come with the various roles they will assume.”

“Eleven: Inform important stakeholders – customers, suppliers, creditors – about the firm’s continuity plan.”

The objective is to reduce any uncertainty about the future of the business.

“Twelve: Develop a contingency succession plan, just in case.”

Carrying out a continuity plan may take five years or more. In that time, emergencies can change the best laid plans. The owner-manager can die unexpectedly or the chosen successor may become unavailable or unacceptable.

It is important to think about the worst-case scenarios and be prepared for what would happen in the wake of such developments.

The family business succession plan must be strategic, comprehensive, feasible and managed effectively by those with power to make critical decisions.