Susan Lazar Consulting, Inc.
Publications for Family Owned Businesses

Publications for Family Owned Businesses

Planning a Successful Succession for Your
Family-Owned Business
By Susan Lazar

Succession happens all the time, all over the world. In many countries, including the United States, presidents and other top leaders succeed one another regularly with amazingly little turmoil, considering all the administrative changes and politics involved. In other countries, however, a change in leadership is rarely accomplished without a military coup.

The same comparison can be made with corporations. For many businesses, the transition from one leader to the next is a carefully planned event that usually takes place over the course of several years. However, a surprising number of companies --including 43 percent of family-owned businesses -- have no succession plan in place. And when the time comes to change leaders, the business can become a battlefield. Quite often, no one wins.

To Plan or Not to Plan

According to one recent survey, 70 percent of family-owned businesses do not survive from the first to the second generation. Poor planning is partly to blame.

Many family business owners don’t develop a formal succession plan because they "know" what is going to happen when they retire. Fred and Bea Hanson, owners of a successful roofing firm, learned the unfortunate consequences of this type of thinking the hard way.

They "planned" to have their son Rick takes over the business when they retired, with Fred and Bea occasionally consulting on big projects during the transition. Unfortunately, they neglected to share their plans with Rick. Although he hadn't worked for the roofing firm for several years, the Hansons assumed and counted on his eventual return. The Hansons had already purchased a retirement home in Florida when they learned Rick was happy in his new career and uninterested in running the family business.

No one else at the company had been groomed to succeed the Hansons, so they were forced to delay their retirement and continue to run the business while they searched for a buyer. In addition, the disagreement over the firm's future has caused strained relations between Rick and his parents.

Successions don’t have to turn out this way. Ray and Dorothy Cook are now relishing the retirement the Hansons had hoped to enjoy. Over the course of several years, the Cooks met with family members and business advisors and developed a succession plan for their electrical contracting firm. They, too, were surprised to learn that their assumed heir, Bradley, had other plans. But daughter Sue was interested in the business, and the Cooks, with their advisors, developed a training and transition plan that provided her with the skills and contacts to run the business successfully when her parents retired.

The Hansons dreamt of a tan, the Cooks dreamt up a plan

What did the Cooks do to prepare for such a smooth transition?  The answer lies in a strategy outlined by Five C’s:

  • Competence. The successor must be a competent individual who has the trust and confidence of all employees and managers. A successor who has business experience outside of the company may find it easier to establish their leadership inside the company.
  • Connection with an objective, third-party. This person, preferably from outside the company, will be able to offer a refreshing perspective on the company’s direction and future planning. Designing a well-mapped two-to-five year professional strategy for the transition, as well as facilitating dialogue between the successor and the parent/owner are some of the important functions of this third-party connection.
  • Caring. Both generations must acknowledge the range of feelings operating during the transitional process. All parties involved, from family members to employees to current managers, will be affected by the change of leadership and they will all have reactions to the transition process.
  • Commitment. A strong sense of commitment and loyalty to the company are crucial when determining the company’s next leader. They must be able to plan beyond their personal success to the success of all employees and the company. It may be important to clarify whether the successor is accepting his/her role because of a sense of responsibility to the parent or out of true desire and agenuine commitment to the company.
  • Communication. Frequent discussion can enable everyone involved to air their feelings before inevitable tensions create crises. Too much effort and energy go into building and maintaining family businesses to see them fail in the next generation simply because individuals are unwilling to be honest with one another.

Today's Heirs

There are steps you can take to help your company survive to the next generation. However, it’s important to realize that the way succession occurs in family businesses has noticeably changed over the past few decades.

Not too many years ago, it was common for young family members to start their careers unloading trucks or doing clean-up on the construction site, and then work their way up. Although this can be a useful way to learn the business, ladder-style leadership development is no longer the only succession strategy for most family firms.

Today, most successors to family-owned businesses have attained some level of higher education and often have worked for other companies. When they join the company after college or several years’ experience, they don’t intend to start at the bottom -- and for good reason. Because of their education and experience, they come to the family business with a level of management capabilities and leadership skills that make them inappropriate candidates for lower-level jobs. They want "real" jobs, ones that already exist and are necessary for the performance and growth of the business. They also want the authority and responsibility to get the job accomplished.

Lee, who heads a drywall business and is now passing the reins of leadership to his daughter, recognizes how times have changed: "I came into the business after high school feeling like I had always worked there," he said. "Since I was a youngster I did odd jobs after school and during vacations. I learned how to run the business by watching my dad and my uncle. If I didn't agree with what they did, I tried something new. It was really a 'seat of the pants' approach to management."

Lee knows his daughter, Kim, is entering the business under different circumstances. "She went to college and learned new ways of thinking -- not just about her school work, but about people and the world in general," noted Lee. "She became a lot more independent and began to question old assumptions within the company. She learned to analyze and support her opinions. She is so much more self-assured and knowledgeable than she was when she finished high school, which is when I took over the business. Sure, she still has a lot to learn, but she also has a lot to offer. I had no qualms about putting her into an entry-level management position. Her experiences in college provided useful information as well as a broader range of perspectives from which to solve problems and make decisions. All of that is good for her and great for the business."

Outside experience is valuable for both the successor and the business itself. Experience in another industry can broaden a potential successor's view and provide new ways to think about business situations. On the other hand, experience in the same industry can make the lessons and ideas learned more readily applicable.

Mike, the successor to his parents' construction equipment business, reported, "By working for other companies, I learned about different management systems and practices. I also had the chance to observe different competitors as well as different markets and strategies. As a result, I am better equipped to identify and analyze new business opportunities for us." 

Darren, who took over his father's plumbing company, offered another perspective. "It was very important that I succeeded on my own merits," he said. "That way, when I began to work in the family business, I had a track record. I had no questions about my ability and neither did the other employees or contractors."

The outside education and experience that a successor brings to the table can do much to ease their transition into the family business. Regardless, the new successor still comes in with a lot to learn -- and it's the responsibility of the current leader to be committed and willing to teach these lessons.

Starting Out (with a little help from a friend)

All employees, no matter what education or experience they possess, benefit from a period of orientation and training to their specific positions and to the company as a whole. Family members are no exception.  

Howard, the outgoing head of a concrete products manufacturer, described his entry into the family business many years ago:  "I came to the office and my dad told me to find out what needed doing and see that it got done. I had no idea what he was talking about and I walked around for weeks feeling foolish and useless. Finally, one of the long time employees in the plant took pity on me and 'showed me the ropes.'  I'm determined not to let that happen to my children." 

If you will be passing control of your business to someone in your family, you can help by planning a smooth entry into the business and opportunities for on-going growth. Consider assigning a formal mentor to your successor, either a trusted high-level employee (who is not a family member) or an outsider hired specifically for the purpose. A senior manager who has broad business experience often can teach young adults much of what they need to know to run the business. To be an effective teacher, the mentor must hold a trusted and useful position and be loyal to the company and committed to its success.

As the company leader, you may feel you are in the best position to train your successor, and eventually you will need to be heavily involved.  But a mentor other than the parent is often invaluable in helping with the early teaching and evaluating of a successor's performance. Often past history and tensions between a parent and child make communication difficult. As a result, the parent/boss's expectations and assessment of their children's skills and accomplishments may be skewed. The parent either is blind to the children's talents or is unable to see their weaknesses.

In addition, parents have trouble teaching their children because they often feel responsible for their children's success and, alternately, blame themselves if they fail. A non-relative with an objective view of the successor's style, approach, accomplishments and challenges will greatly benefit the parent, the child and the company.

"I really needed support and guidance from someone other than my parents as I became more responsible for running the business," observed Kevin, the successor in his family's asphalt business. "My dad and I have very different styles. We always disagreed and he was constantly correcting and criticizing me. James became my mentor. He pointed out areas of concern, helped me learn the things I needed to know, and at the same time, took the pressure off my dad. His work with me probably salvaged my relationship with Dad.

Non-family mentors are important even when family relationships are strong. They can be particularly valuable if the mentor is responsible for business activities that are outside the owner's direct responsibilities and interests. In this case, the successor will learn aspects of the business he or she might not learn from the owner, and will not be competing for the owner's territory. In addition, a mentoring situation can build and solidify relationships between valuable, long-time employees and new family members who will one day run the company.

Cameron, the newly appointed successor to the family remodeling business, speaks fondly of the senior manager who became his mentor. "I don't know what I would have done without George," Cameron said. “His coaching and guidance helped me learn business principles, as well as how to manage time and people. His interests and Dad's complemented each other, so George's mentoring taught me areas of the business I would not have learned from Dad."

The teaching in a mentor relationship usually occurs over a period of two to five years. After that, the relationship tends to lose its effectiveness as the successor assumes new challenges and moves into more responsible positions. At this point, it is important for the current leader to become more involved and to provide the successor with access to the data and information necessary for making informed business judgments and valid decisions. As the successor is given more responsibility in the company and he/she begins to report to the current leader, the mentor may no longer necessary.

Training a Successful Successor

The training or preparation process for upcoming leaders should be structured to help them obtain the broadest possible range of knowledge possible. Successors should cultivate skills and abilities in all areas of the firm. Field or line positions that ultimately lead to supervisory management work well. Staff positions, because they don't offer clear responsibility and accountability, are not as effective as training grounds.

"I really like sales and I'm good at it," recounted Mohammed, the new head of his family's residential construction firm. "It worried me to work in other areas of the business--maybe I wouldn't do a good job. But, I'm really glad that Dad insisted I move around to all areas. Now I feel confident in my knowledge and understanding of the whole business."

It is also important for soon-to-be successors to learn about and develop an appreciation for the history, culture, strategy, and philosophy of the company. The culture of a business consists of beliefs and values, patterns and traditions, rules and roles that have guided the company and contributed to its success. Corporate culture is powerful and important, and successors must recognize and respect it. The scope of understanding that is needed may come from the current leader, a mentor, or past and present employees. Conversations with long-time employees can provide important information about the business as well as valuable company lore.

Gary, the new head of a steel construction firm, put it this way: "If I hadn't talked to a couple of the old-timers, I never would have appreciated the impact of decisions that were made forty or fifty years ago. I would probably have blundered right in, trying to change things without a full understanding of their history and value. I certainly would have offended people and probably would have made my transition more difficult."

Maria, who succeeded her mother in the family plumbing supply business, described a business rule of treating the distributors right:  "I didn't really understand what that meant until I saw my mother recall a product and replace it with something that was much more expensive. My mom explained that our distributors lost their profit and it was our responsibility to make it up to them. I also learned why my family's reputation is terrific and why firms who deal with our company are so loyal."

The successor's interpersonal skills are another key factor for successful leadership. An effective personal communication style, strong conflict management skills, and good public presentation abilities are essential components for anyone aspiring to the top. Other characteristics that contribute to the successor's readiness for head management include the ability to delegate authority, give direction, hold others accountable, and follow through. These are important characteristics to look for when choosing a successor, or alternately, to help develop in a successor who has already been chosen.

Tony, the successor to his family's development company, talks about his new responsibilities:  "I thought I was a good communicator because I was good at landing contracts. When I became head of the company, I suddenly realized that I had to communicate with lenders, suppliers, contractors, community and industry representatives, and the employees, as well as the customers. It was a whole different ball game and quite an awakening. So, too, was strategic planning. My ability to set short and long-term strategies for the future growth and direction of the business, as well as planning for the career growth and development of my employees was crucial. I had a lot of learning to do."

A successful transition is more likely to occur when the successor is able to take full advantage of the present leader's availability and knowledge. This is particularly important in transferring important personal and business relationships. Ana, who succeeded her father in an engineering and surveying firm, explained:  "Dad taught me a lot of things I needed to know about the business. What he didn't teach me was how to maintain and create relationships with our bankers. All the bankers dealt with him. Now he's gone and I'm having a hard time establishing relationships with people who are critical to our business." 

On the other hand, Gene, successor to his family's mechanical contracting company, said, "I'm grateful that my folks took time to introduce me to the professionals and business people who are essential to our company. Once I met them, my folks gradually let me take the lead in dealing with them on everything from purchasing to negotiating loans. It was one more thing I felt at ease with and one less thing I had to worry about and learn when I took over the business."

One final point:  If several family members enter the business, they should be aware of the criteria, status, and process for selecting the company's next leader. They should know whether a leader has already been chosen. If a leader has not been chosen, they should have the information they need to evaluate their skills and experience against the expectations that have been created for the new leader. They should also be clear about the time frame for the selection process.

"I thought I knew what the plan was for naming my cousin's successor," commented Sara, who is now second in command at her family's demolition company. She remembers her frustration and confusion when finding out that so much had been going on behind her back. "I discovered that decisions were being made and changes were taking place without my knowledge. Yet I was one of the candidates being considered for the leadership role."

Time for Transition

The transfer of authority and responsibility to the new leader is often the most difficult and complex step for both the leader and the successor. For the leader, relinquishing the reins means letting go of activities that have given life meaning.

One outgoing leader described his feelings: "I'm between a rock and a hard place. I've devoted my life to building this company. Most of my activities, including friends and vacations, revolved around it. I really want the company to continue into a new generation, but when it does I will lose my baby."

The successor has the same problems, but from a different perspective. Children may find it difficult to challenge their parents as business colleagues with whom they debate decisions, rather than parents who "have the last word." 

"My dad and I have usually gotten along and I'm not used to challenging his decisions," said Dale, the new leader of the family masonry business. "I find myself in the uncomfortable position of disagreeing with him. He doesn't think we need a budget, but I'm not willing to make major investments in equipment, for example, without a plan that includes a budget. I need help learning how to express my opinions and stand up for them. After all, I'm the one in charge. But, when I start to talk with him, I feel like a little kid.&quot

Dylan, who took over his father's excavation business, expressed similar feelings. "Disagreeing with my dad is so touchy. First of all, I have to be careful to only disagree privately. Secondly, it seems like the minute I express an opinion that's different from his, he throws up his hands and walks out. He's clearly hurt and angry that I don't see things his way. On the other hand, I would really like his support for my decisions. It's a tough situation."

Sharing decision-making authority also means sharing information, something with which neither generation may feel entirely comfortable. Open dialogue and regular communications about feelings and issues are the most effective way to deal with an unsettling transitional situation.

Often it is wise to bring in an objective third party to help family members address the difficult issues that can delay or adversely affect the transition process. This third party can help forge a planned, professional strategy that will lead to constructive change -- change that improves communication, provides effective problem solving, initiates positive decision making, and promotes affirmative conflict resolution.

The making of a new generation of leaders in a family business encompasses a variety of stages and skills. A thoughtful, planned approach will make the transition of leadership easier and will enhance the new leader's likelihood of success.

Ms. Lazar is the president of Susan Lazar Consulting, Inc., a firm based in Minneapolis consulting to family-owned, owner-managed, and closely held businesses.

*Names in this story and other company details have been changed.